With the morning economic data having come and gone with little fanfare, the most significant role today can fill is as a placeholder. It offers the bond market an opportunity to vote on whether or not yesterday’s rally was a token “oversold correction” (the ayes have it) and to position for tomorrow’s Jackson Hole speech from Fed Chair Powell. Surely someone has informed him of the buzz surrounding R-star since his last speech, so odds are greater for volatility tomorrow. Today is uneventful so far with modest losses overnight and a small chance for a reaction to today’s 30yr TIPS auction. Normally, TIPS aren’t worth mentioning, but given the current preoccupation with “real yields” in financial circles, this one could be an exception.
That said, it wouldn’t be an exception in a bigger picture sense. In other words, it wouldn’t create any lasting momentum or a big enough reaction to change anything at all. TIPS yields are actually fairly uninteresting relative to the current level of buzz. They’ve almost perfectly mirrored and matched their non-TIPS counterparts all year.
Moreover, they’ve done a pretty good job of capturing the inflation implications. If we subtract TIPS yields from cash yields, we can see “market-based inflation.” Traders also refer to this is “TIPS Breakevens.” In general, it should simply convey the bond market’s inflation assumptions. Bottom line: looks pretty similar to actual inflation.
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