Heavy selling of TIPS is expected to worsen in the face of a heavy issuance calendar for the coming months and the selling could surpass April's near high mark. The repositioning is causing TIPS breakevens to narrow, indicating underperformance versus nominal Treasuries. Such sell-offs should continue as investor demand for new issuances increase, leaving dealers with thinner inventories, according to Alex Li, interest-rate strategist at Credit Suisse First Boston.
The number of TIPS shorts soared to $2.1 billion in April, shy of the $2.4 billion of TIPS shorted in October last year, according to data recently released by the Federal Reserve Bank of New York. The near high of short positions came as dealers sold TIPS to make room in their inventories for new supply, Li said. Such sell-offs have caused breakevens on 10-year TIPS to narrow by an average of 10 basis points.
The market may see such sharp shorting again in July, when the Treasury is scheduled to issue $10 billion of new 10-year TIPS and $8 billion of 20-year TIPS, Li said. He declined to speculate how much shorts would increase or which issuances were most affected.
