10-Year TIPS Auction Insights
The US reopened 9-year, 10-month Treasury Inflation-Protected Securities (TIPS) and sold them with a yield of 1.734% plus inflation. This yield reflects a change from the previous auction, which recorded a yield of 1.985%.
There was a big tail of 4.6 basis points due to recent trends in the TIPS market. The bid-to-cover ratio stood at 2.020x, which is lighter than the average of 2.36x from the past six auctions.
The 10-year TIPS auction showed some immediate weakness, clearing with a big 4.6 basis point tail. The low bid-to-cover ratio, sitting at just 2.02x against a 2.36x recent average, tells us buyers were hesitant at these levels. This suggests the market may have gotten ahead of itself after the recent rally.
However, we need to focus on the Federal Reserve’s likely next steps, as the market is now pricing in a high probability of a rate cut before year-end. The latest August jobs report showed payrolls slowing to just 98,000, and last week’s CPI figure confirmed core inflation has fallen to 3.1%, its lowest level since 2023. This data supports the view that the Fed will soon pivot, which would push real yields down significantly from here.
For us, this is a signal to consider trades that profit from falling real yields over the coming weeks. Buying call options on interest rate futures or on a TIPS-focused ETF provides a leveraged bet on this scenario. This allows for a defined-risk way to position for a dovish shift from the central bank.
Watching Breakeven Inflation Rate
We should also watch the breakeven inflation rate, which is currently around 2.4% for the 10-year. If the Fed cuts because of slowing growth, inflation expectations could fall, creating complex cross-currents for TIPS. The key is that the recent weak auction data presents a tactical entry point before the market fully prices in the coming easing cycle.
This situation feels similar to what we saw in late 2018, when the market correctly anticipated the end of the Fed’s hiking cycle before it was obvious. Being positioned in duration trades back then paid off handsomely. The current setup, with weakening data following a period of high rates, suggests a similar opportunity is now on the table.
