Inflation Expectations Reach Highest Level in More Than a Decade

Elizabeth Stanton
·2 min read

(Bloomberg) -- Market-implied expectations for U.S. inflation for the next half-decade surged to the highest in 15 years on Thursday as investors hedged against the risk that consumer-price pressures fail to abate.

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The increase in the breakeven rate for five-year Treasury inflation-protected securities was particularly striking as it coincided with the biggest-ever auction of the securities. The $19 billion offering drew a record-low yield of negative 1.685%, below where it was trading before the auction, a sign that demand exceeded dealers’ expectations.

Breakeven inflation rates for TIPS are rising as U.S. Treasury yields climb, while demand for inflation-protected notes and bonds has kept their yields relatively stable. The difference in yield represents the inflation rate needed to equalize their returns.

For five-year maturities, the regular Treasury note’s yield topped 1.2% Thursday, the highest level since February 2020. The 2.88 percentage-point difference between the five-year TIPS yield and a comparable regular Treasury yield is the highest since 2005. Ten- and 30-year breakeven inflation rates reached multiyear highs this week as well.

Investors are protecting against the risk of persistently elevated inflation in the wake of the Federal Reserve’s new approach of letting inflation run hot as the economy recovers from the pandemic. Crude oil futures fell from a seven-year high Thursday, and the Bloomberg Commodity Index dipped from a six-year high.

Inflation’s path “has become more uncertain lately, and over that five-year time horizon it’s going to remain uncertain,” Tiffany Wilding, chief U.S. economist at Pacific Investment Management Co., said on Bloomberg Television. But inflation faces both upside and downside risks, and “the market’s still giving Fed a lot of credibility around its longer-term inflation goals.”

The five-year breakeven rate compares with a year-on-year growth rate for the consumer price index of 5.4% in September. Breakeven rates have risen with oil and gasoline futures, after they ebbed from their May highs as central bank officials in subsequent months said inflation trends warranted a withdrawal of accommodation. The Fed is expected to start tapering its asset purchases as soon as next month.

(Updates yield levels. An earlier version corrected day reference in fourth paragraph.)

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