HALISTER1: Sell 10Y TIPS on Breakeven Amid Low Inflation, Hawkish Fed: TD

Sell 10Y TIPS on Breakeven Amid Low Inflation, Hawkish Fed: TD

(Bloomberg) -- Even after Friday’s sharp drop, 10Y TIPS breakevens “look rich given the trend in inflation and a Fed that continues to hike amid sustained faith in the Phillips curve,” TD strategists led by Priya Misra say in note.
  • They recommend 10Y TIPS breakeven tighteners at 186.5bp (Thursday’s close at 189.5bp was highest since May), targeting 170bp, stop at 195bp
  • Fed “continues to largely shrug off the weakness in inflation as transitory”  
  • Next week’s 30Y TIPS reopening has potential to put pressure on breakevens, which remain ~20bp higher than pre-election levels
  • Risks to trade include a rebound in oil prices and an agreement on tax cuts, which appears unlikely over next several weeks
  • NOTE: Phillips curve is an economic model that correlates higher inflation with decreased unemployment
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Vivien Lou Chen

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Priya Misra (TD Securities USA LLC)

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