Taps Coogan – February 2nd, 2021
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The 5-Year breakeven inflation rate, which looks at the yield differential between the 5-Year Treasury and the 5-Year TIPS, is currently 2.18%. With the exception of a few months in 2011-2013, this is the highest reading since the Global Financial Crisis.
Why does this matter?
Inflation breakevens are the Treasury market’s implied average CPI inflation rate over the coming years. While the predicative track-record of breakevens is spotty, they are nonetheless forecasting that inflation will be higher than 2% in the coming years and higher than it was for the six years prior to the Covid pandemic.
Anytime implied inflation has gotten near this level since the Global Financial Crisis, it has proved to be a peak in inflation and growth expectations.
If you want to know whether we have truly turned the page on the last decade of ‘low’ CPI inflation (which has little to do with real inflation), keep an eye on these breakevens and how the Fed reacts to them. This is the danger zone for the reflation trade.
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