Beware the risk and liquidity premia, when inferring inflation expectations from breakevens.
Figure 1: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red, left scale), both in %. Source: Treasury via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 8/3/2023, and author’s calculations.
Figure 2: Ten year inflation breakeven calculated as ten year Treasury yield minus ten year TIPS yield (blue), ten year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red, left scale), both in %. Source: Treasury via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 8/3/2023, and author’s calculations.
Figure 3: Thiry year inflation breakeven calculated as thirty year Treasury yield minus thirty year TIPS yield (blue), in %. Source: Treasury via FRED, Treasury, and author’s calculations.
While breakevens have decline since end-2022, estimated expected inflation has remained pretty high through end-June.
I wonder how different America would look now, if the government apparatus worried as much about Robert Kennedy and MLK as they do the personal security of an orange colored narcissist and scam artist?? Just something to think about in the early hot August.
I noted some dumb press story that looked at 30-year nominal rate and 30-year TIPs yields today both of which rose since July 31. Now somehow the press reporter concluded that since nominal and real rates both increased, expected inflation is out of control. We need a better press core.
Speaking of real interest rates:
JohnH
August 1, 2023 at 6:29 pm
Personally, I would never rely on ‘expected inflation’ to calculate an ex ante “real” return, given how bad the forecasts of expected inflation have been over the past few years.
Never mind the fact that the ex ante real return = nominal return minus expected inflation.
BTW Jonny boy a year ago was mocking anyone who said back then they expected 3% inflation. And what was the increase in the price level over the past year? Yep – 3%!
Off topic but fans of basketball weigh in:
https://www.msn.com/en-us/sports/nba/nba-players-association-issues-statement-separating-players-from-desantis-pac-donation-by-orlando-magic/ar-AA1eKIt6?ocid=msedgntp&cvid=deff5fce2a644d7aa322b8e116f75aa6&ei=18
The National Basketball Players Association issued a statement on Aug. 3 distancing their players from the actions of the Orlando Magic franchise, which donated $50,000 to Never Back Down, a political action committee in support of the presidential campaign of Republican Florida Gov. Ron DeSantis. “The Magic’s donation does not represent player support for the recipient,” the statement read. The NBPA described the Magic’s contribution as “alarming given the recent comments and policies of its beneficiary.” The statement also stressed that while anybody associated with the NBA is free to express political views, it must not be done in a way that misrepresents the views of others within an organization.
The reminded me of when Tom Brady was caught wearing a MAGA hat. Then again – I never cheered for Brady or the Patriots. Plus I thought the NBA had higher standards than the NFL when it comes to basic decency.
What are my thoughts as a casual NBA fan?? DeSantis is a non-charismatic candidate, who is already losing the campaign funding war, and has a proclivity to shoot himself in the foot and overspend campaign resources. None of it matters because if the PAC donations were thrown directly into your Brooklyn apartment toilet they’d have the exact same effect on the ’24 presidential race.
The WSJ reports on the declining profits of AB InBev. End of greedinflation? Well no – it is just Bud Lite sucks as a beer but check out the 2nd graph:
https://www.wsj.com/articles/ab-inbev-bud-q2-earnings-report-2023-90a57dee?st=u3vctyi5qku894o&reflink=desktopwebshare_permalink
Modelo Especial sales are way up. People have figured out it is a real beer!
Modelo Dark is one of my favorite go to beers. But recently I tried “Pacifica” in the yellow can. Which is kinda weird for me because the promos don’t really appeal to me, they are the preppy douche frat brat type, which turn me off. But they advertise heavily during one of the TV shows I like to watch, so I thought I’d pick up a couple of cans. It’s not bad. I probably still like Modelo and Heineken more, but I will still pick up a couple more cans probably. Then back to my routine.
I miss the old school beer adverts with the half naked girls, but I guess we have to wait for the cultural pendulum to swing back before we get to see those again. I keep on thinking about getting some Bud Ice but I have to pick up in the huge boxes or nothing.
This is something which could slow down inflation. And I’m not trying to be funny either. This is pretty solid writing for a Yahoo link. I about had to do a double take 3/4ths of the way down to see if it wasn’t some “partnership” thing Yahoo borrowed from WSJ.
https://finance.yahoo.com/news/americans-owe-a-record-1-trillion-in-credit-card-debt-205759223.html