A crucial measure of the U.S. market’s inflation expectations has increased in the past few days, cementing concerns that the Fed cannot bring the rate of increasing prices down to its long-term target of just two percent.
As of this week, the gauge called the 10-year break-even rate showed that bond market investors anticipate that the CPI will go up by a yearly average of 2.62 over the decade, the highest amount since 2012.
The five-year break-even inflation number went up to 2.86, the highest since back in 2005.
Surging energy prices, clogged transportation lanes, port congestion, supply chain problems, a shortfall of truckers, and an unexpected labor shortage have all led to inflationary pressures around the world. The Biden White House’s last round of stimulus payments worked in driving up consumer spending, making the inflation problem worse.
The break-even rates are found by the difference among yields nominal United States Treasurys and Treasury inflation-protected securities, also known as TIPS. The latter boosted its payout when inflation rises. The yields on TIPS are usually lower than normal Treasurys of the same maturity since they are not taking inflation risks. It is called the break-even rate since it is the rate where TIPS investors would earn the same as Treasury investors if the CPI matches the yield difference over the life of the bonds.
Corporate leaders have used their quarterly results to talk about the impact of inflation on their numbers, with many warning about squeezed margins and the need to increase prices. Executives have also spoke about why they don’t see signs of inflation going away, although the price increase rate is still expected to go down from the highs of this summer.
Thursday had the biggest-ever auction of TIPS, a whopping $19 billion offering. The auction gave a record low yield of negative 1.685 percent. This was lower than even pre-auction yields, which bond traders say means the demand for securities went past market expectations.
The Fed closely watches break-evens along with surveys of business executives and consumers to gauge inflation expectations.
Author: Steven Sinclaire