Is the TIPS market signaling lower inflationary expectations?

From the Wall Street Journal:

A closely watched gauge of inflation expectations is telling the Federal Reserve that it can leave rates low for a while to help the economy heal.

The five-year, five-year forward breakeven rate–that is, the market’s expectations for inflation between 2015-2020–has come down sharply since February and currently implies an inflation rate of 2.60% for that period. That’s down 0.30 percentage point from the historic high of 2.91 percentage points on Feb. 1, which implied an inflation rate of 2.91%.

After rallying strongly in late 2009, the iShares Barclays TIP Bond Fund is down about 2 percent so far in 2010:

Reduced inflationary expectations?

But inflation-unadjusted Treasury long bonds have fared only slightly better. The iShares Barclays 20+ Year Treasury Bond Fund, for example, is just about flat year-to-date:

Does this look like a rally to you?

Perhaps inflationary expectations have declined slightly during the past two months, but if so not by much.

(Disclosure: The author recently purchased an inflation-adjusted bond fund.)


One Comment on “Is the TIPS market signaling lower inflationary expectations?”

  1. […] We have covered the ups and downs of TIPS in the past here at Inflation Watch. Throughout the fall of 2009 we pointed out that TIPS were signaling relatively high levels of inflation and were far out-performing Treasurys (see here for example). In late January, TIPS imputed an inflation expectation above 3% over the next 5-10 years. Finally, in March, we wondered whether TIPS were then sginaling lower inflation expectations. […]

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