U.S. TIPS Breakeven Strategy : Opportunity for Q1 2016

Last week, while UST 10 year rate remained previous week's level, TIPS breakeven rate soared by 8bps following TIPS rate plunged alone. This seems somewhat significant because this was in line with weak oil price. For now, US 10 year breakeven rate is higher than 1.6%.

It maybe because market participants start to draw next year's picture about the inflation.
Unless there are additional weakening pressure for oil price below current 40 dollar per a barrel, CPI could rise very fast with a base effect.

Bloomberg consensus suggests 1.7% for average CPI yoy growth in 1Q next year and this implies about average 0.11% growth rate of each month. This number is not seem high. With underpinned oil price, we may see the upside surprise in this period.

Especially in light of benefit for the spark from base effect, CPI yoy in January 2016 maybe the highest level in 1st half next year. Bloomber consensus implies 1.9% nearby 2%...!! This number will be released in next month, February, so we have opportunity on TIPS breakeven from December this year to February next year particularly.

We have to buy TIPS and sell conventional UST (in 10 year tenor) during this period when breakeven become weaker than fair level...!