IFR Not an Equity story ..Yet US Govts Review

IFR Immediate Alert Global Squawk Box US GOVTS-Not an equity story (yet); more about real yields; dollar/gold bear watching as well Jul 21 2020 09:09 The main gravitational pull on UST yields and in far and away fashion remains monetary policy and the Fed’s guidance that it will stay at the zero-bound until further notice. This has effectively robbed the market of any sellers of note with buyers and mainly of the end-user variety in a queue trying their best to accumulate paper.

Being most sought out over the past several weeks are real yields otherwise known as TIPS. Indeed, since the beginning of June 10-year TIPS have seen their yields decline by roughly 37 bps (with 20 bps of the decline occurring this month) as the 10-year nominal yield declined by roughly 5 bps (from 0.66% to 0.61%) pushing out the break-even spread roughly 32 bps to -147 bps last.

Much of the improvement and outperformance in TIPS is seen as due to the complex making up ground lost in the early-to-mid March debacle when financial markets unraveled as Covid-19 washed onto US shores. In early March the 10-year TIPS B/E spread was at -147 bps only to collapse to -50 bps by March 19 to now return back to where it was in early March. Helping to make up this lost ground was/is the Fed’s large scale purchases that have an outsized effect supporting the more illiquid and lightly supplied TIPS complex.

The favoritism for TIPS is now extending into fundamental realm where the weakening dollar and the surge in precious metals and other hard assets is having investors favor the sector for their inflation protection attributes. As well, from a relative value perspective versus nominals they still appear as appealing from a total return basis. Even so, and as TIPS/real yields trend lower they are helping to underpin nominal yields as well. Rather than any connection to equities the current situation remains that of favoring the buying of dips in near all markets. Refinitiv Global Markets, Inc. is a Registered Investment Adviser. Refinitiv Global Markets disclosure statement is available on the web at https://www.ifre.com

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