Monday, August 22, 2011

Breakeven Rates: 1% for 2-Year and 2% for 10-Year

"Breakeven rates" are the differences in yields on regular and inflation-indexed T-notes over the same time horizon, and are measures from the bond market of the expected rates of inflation over those time horizons. 

The current 2-year "breakeven rate" is less than 1% (0.935%, top chart), and down significantly from the recent peak of 2.67% in late April, and now at the lowest level since last year.  The 10-year breakeven rate is trading at just slightly above 2% (2.046%), and was trading below 2% last week.  

Although commodity markets are telling a different story, the bond market seems to be suggesting that inflationary expectations have been falling, and according to breakeven rates are now back to last year's levels. 


At 8/22/2011 8:05 PM, Blogger Benjamin Cole said...

Commodity markets do not forecast inflation--although they have become speculative.

Real global demand from huge India and China swamps commodities markets. The USA is a sideshow.

But if commodities forecast inflation, explain natural gas.

Bond markets forecast anticipated inflation.

Inflation is dead, according to bond investors. And even that may understate the case.

The Fed is fighting the last war, the way public agencies always do.

We are still fighting the Cold War (at least in terms of budget and organization), the War on Poverty, the drug war, and the war against inflation.

Times change. Public agencies never do.

At 8/23/2011 8:35 AM, Blogger morganovich said...

the bond market is demonstrating access to leverage and forced buying.

banks are buying this at 10:1 (at least) gearing. mny are over 20:1. freddy and fannie have taken away their traditional mortgage markets. they have nowhere to go but govvies. the spread looks VERY different if you take that into account. the Chinese are buying to hold their currency down.

you are treating this market like it's just mom and pop buying bonds for cash based on good data. it's not, therefore it sends a very different signal that the one you are assuming.

even if we accept current CPI, the one year has a massively negative real yield and has for the last year. how do you explain that mark? what rational cash buyer would take rates 345bp under inflation?

that's an indicator of severe recession and flight to safety.

also note:

CPI is going to stay lowish. it's inflation that isn't. CPI will never read high. our current methodology would never have read above about 5% through the entire 70's.

meanwhile, imports and exports are up double digits. finished goods PPI is running at 7.2%. gold is parabolic.

as you say, commodities are the much better hedge. there are lots of ways to play inflation. swapping out the speedometer to read lower does not change what's happening to the car.

firestorm inflation partners (a hedge fund) has a great think piece on this i'll try to dig out for you.


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