The Treasury auction drama continued on Tuesday with a tailing 10-year TIPS sale.

I should emphasize: There’s a reason I’ve devoted so much time recently to Treasury auctions. Supply concerns were the driving force behind the “earthquake” (to quote Chris Waller) repricing at the long-end of the curve. It was that repricing which tightened financial conditions and undercut equities late in Q3 and into Q4, prompting the Fed to suggest that another rate hike may not be necessary after all.

This month, Treasurys managed to recoup their 2023 losses thanks to a run of soft data and the perception that the Fed is indeed finished raising rates. There was but one blight on November’s otherwise bullish bond backdrop: A very poor 30-year sale on November 9. On Monday, a relatively solid reception for a $16 billion 20-year offering appeared to allay lingering supply concerns.

Fast forward to Tuesday, and the weak TIPS sale had the potential to trip up stocks. The non-dealer bid was quite weak. Dealers ended up with 13.6% of the sale, far above average. Indirects took the lowest share since the summer of 2022.

It’s important to understand what likely happened here. Although consumers are apparently still concerned about inflation judging by the disconcerting uptick in longer run expectations on the University of Michigan’s series, the inflation data itself (i.e., CPI and also PPI) suggests the Fed will ultimately succeed in slaying the dragon (so to speak). The more likely inflation is to recede, the less protection against inflation you require.

Breakevens are contained, crude is falling and the Fed has evinced no inclination to declare victory anytime soon, which ostensibly raises the odds of an “accident” — i.e., policy is kept too tight for too long with the end result being recession. A recession would be disinflationary.

Finally, reals are obviously well off recent highs. Sure, there’s a good case to be made for locking in what may, in hindsight, be viewed as “high” real rates, but there apparently wasn’t enough value to tempt investors at Tuesday’s sale despite a modest concession headed in.

Why was the weak sale a problem? Well, it may not be a problem beyond Tuesday. But the knee-jerk will naturally be higher reals, and that’s bearish for risk assets.

Coming quickly full circle, it’ll be worth keeping apprised of auction results for the foreseeable future. There’s a lot to glean, not just about the supply-demand (im)balance for coupons, but also about investor perceptions of the macro-policy nexus.