Morning Notes — Debt Ceiling and Real Yields

Once the debt ceiling issue is resolved, we’d expect nominal bond yields to resume their recent back up with gentle curve steepening. The recent rise in break even yields reflect concerns that inflation is likely to be more persistent. Tapering expectations are also causing inflation break evens to rise faster than nominal yields because the Fed has been buying nearly all the net issuance in TIPS markets since March 2020.  As the Fed begins to taper, the duration supply of TIPS in the market will likely increase substantially, limiting the potential for beak even yields to widen relative to nominal yields.  This valuation dynamic could mean that real yields are about to move higher.