US 10-year Tips are feeling the full brunt of taper-talk. First there was an abrupt sell-off on Wednesday in the 30 year sector, with break-even rates moving lower across the whole Tips spectrum after the US consumer price index fell for the first time in six months. Then there was a swift recovery with strong auction demand on Thursday following the Philly Fed. As TD Securities" Richard Gilhooly observed: Treasury will auction $13bn 10yr TIPs at 1pm, a second re-opening that will take the benchmark size to $41bn. The real yield is around 61bp after the market has bounced on weaker Philly Fed, with 30yr nominals steepening out to new highs on the 5-30s curve before some aggressive buying in the 30yr sector materialised in the past half hour. 10y Real yields have ranged from 32bp in late October to a high of around 90bp in early September and an absolute low of -75bp in April of this year. TIPs have continued to display a beta of more than 1 in recent months, though not as strongly >1 as in the liquidation trade of May/June, when real yields aggressively led to sell off to higher yields and break-evens fell hard in a rising yield environment. Typically, rising nominal yields are correlated with wider break-evens and TIPs out-performing but the opposite has been true as the Fed surprised the market with Taper-talk earlier this year. Yesterday's abrupt sell-off in the 30yr sector and much steeper curve again saw breaks move lower, this time only by 2bp or so, with 5yr breaks moving lower by more like 8bp in recent days from the 186bp level even as oil prices seem to have found a floor. Though Gilhooly, himself, isn't too much of a believer in the reversal: Negative carry resulting from recent CPI prints and upcoming negative seasonals are another reason for front-end TIPs performing poorly, while the feel-good factor of Yellen's words have worn off.This could just be a supply set up for aU.S. 10-Year Inflation Notes Draw Most Direct Demand Since 2011uction or it could be something more sinister and we side with the latter, expecting any post-auction rebound in break-evens to fade pretty fast into month-end. That said he concedes the reversal possibly does make Friday's re-opening of the 10-year offer somewhat appealing: That said, today's 10yr re-opening is an opportunity to buy some TIPs with an auction concession, with the real yield much higher and 10yr breaks only very marginally lower, at ~216bp. The 2nd re-openings have all tailed in the last 3 November auctions, around 2-3bp. May re-openings have been more mixed and might reflect the better seasonals in May and the typically negative carry around year-end as CPI prints are seasonally weak. We like buying 10yr TIPs at auction and playing for a tail and hedging up the position with a short in 5yr TIPs. A long breakeven 10yr position might work for a few days, but we suspect the 5yr b/e has not finished its downward move, although some selling in the 5yr break-even since yesterday might already be connected to buying 10yr breaks out of auction today. The 5yr TIP will be re-opened in mid-December and we expect to see lower breaks into year-end. It's all a bit of a volatile merry-go-round. Related links: U.S. 10-Year Inflation Notes Draw Most Direct Demand Since 2011 - Bloomberg U.S. 10-Year Yields Reach Two-Month High as Jobless Claims Fall - Bloomberg As TIPS Tumble, Maybe We Won't Have to Go To Electronic Money to Enforce Negative Rates! - Climateer Tips are the best - FT Alphaville US consumer price index falls for first time in six months - FT