Is the TIPS market signaling lower inflationary expectations?Posted: March 7, 2010
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:
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:
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.)