If the Fed doesn’t care about this they REALLY don’t care about inflation?

2008-01-24 5Y5Y Break-even Inflation since 2006

5Y5Y Break-even Inflation since 2006


8 Responses

  1. That looks like a daily chart. What does that series look like on a longer term basis? Are we breaking out of a range? Thanks.

  2. and if you look at 10y nominals and 10y b/e’s you’ll see that fully 2/3 of the 10y yield is inflation compensation, with only 1/3 of that nominal yield a real return on your money…and that’s before taxes. now maybe that just means tips themselves are expensive, but one thing’s for certain: real rates are very, very low, perhaps even lower than they were in 2003.

  3. what i think you are getting at is the 10 year tips floater is now priced at cpi plus about 1.4%. This means the expected spread between cpi and fed funds is about that for the next 10 years (plus a small credit spread), which means the markets pretty much never expect the Fed to increase the ‘real rate’ to fight inflatin.

  4. Will do. Bloomberg Only goes back to April 28 2006, Sada will get that up when she returns from taking her dog to the vet for a checkup.

  5. what i meant was that at one point yesterday the current 10y tip yielded 1.10% while the nominal 10y yielded 3.30%. thus fully 2/3 of the nominal yield was compensation for inflation and just 1/3 (the 1.1%) was a real return. we ran a history of this relationship over the course of the tips program and found that the inflation compensation (as a pct. of the nominal yield) had never been this high, and usually only accounted for 40% of the nominal yield, with the remaining 60% being a real return. thus one of 2 explanations: 1) the 10y nominal is very, very expensive given inflation expectations, or 2) inflation expectations are very, very expensive given where 10y nominals are. in either case, real rates are historically low when looked at in this context, and are indeed quite stimulative.

  6. right, got it.

    The nominal yield is the anticipation of future fed funds settings less a credit spread.

    The tips then implies the inflation component of that yield along with the ‘real’ spread.

    Currently the markets are discounting an extremely low real rate by the Fed over the next 10 years as you point out. It’s an expression of expectations of Fed policy regarding a real rate, which currently happens to be negative.

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