Inflation Breakevens: Common and Uncommon Shocks

Assuming unadjusted nominal-real yields are a good indicator of inflation expectations (see yesterday’s post for why maybe not), it’s interesting to see how market based inflation expectations have moved over the recent past (pre-today’s ECB decision):

Figure 1: Ten year inflation breakeven for US (blue), for UK (green), for France (tan), all in %. US based on constant maturity Treasury-TIPS spread, UK for Treasury-Gilt spread, France for spread between Treasury (mat. 5/36) and indexed (mat 3/36). Source: Treasury via FRED, BoE, and Tresor, and author’s calculations.

Notice that the French and US breakevens rose simultaneously with the expansion of the Russian invasion of Ukraine (thanks, Putin!). The UK breakeven remained fairly constant. although it shared a mini-spike in mid-June with the other two series. That’s not to say the breakeven for the UK has stayed constant. Go back to mid-2016, and you see a jump there (so, there’s the uncommon shock).

As I noted at the outset, these are unadjusted (for inflation risk, liquidity premia), which can be important. Adjusting for the premia, US expected inflation has risen steadily since February 24.

Figure 2:  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), both in %. Source: FRB via FRED, Treasury, NBER, KWW following D’amico, Kim and Wei (DKW) accessed 9/7, and author’s calculations.

No reason for the inflation risk premia and liquidity premia (and in France, default risk over the eurozone crisis period) to behave as they do in the US. Hördahl and Tristani (IJCB, 2018) compare US and French inflation breakevens adjusting for spreads, through 2014. I’m sure the real time adjusted series exist somewhere for France and the UK, so any tips welcome.



6 thoughts on “Inflation Breakevens: Common and Uncommon Shocks

  1. pgl
    30-Year Fixed Rate Mortgage Average in the United States

    Well it finally happened. Princeton Steve several weeks ago told us that this interest rate was over 5.7% and rising. Now it has been rising of late and has finally reached 5.89%. Of course, this news does not make what Stevie pooh said several weeks ago any less dishonest.

    1. Anonymous

      comm’l crude stocks rose 8.8 mbbl over week of 26 aug!!

      while strategic petrol reserve declines 7.5 million.

      wti is less than an open market

      and exports were 686 mbbl/day down from 3 weeks avg >2000 mbbl/day

      1 nov spr ~380 million barrels a lot of it good for gasoline not so much for distillates!

      maybe things are slowing down?

  2. pgl

    Putin wants to be manly man so he issued some bizarre 31 page doctrine:

    President Vladimir Putin on Monday (5 September) approved a new foreign policy doctrine based around the concept of a “Russian World”, a notion that conservative ideologues have used to justify intervention abroad in support of Russian-speakers. The 31-page “humanitarian policy”, published more than six months into the war in Ukraine, says Russia should “protect, safeguard and advance the traditions and ideals of the Russian World”. While presented as a kind of soft power strategy, it enshrines in official policy ideas around Russian politics and religion that some hardliners have used to justify Moscow’s occupation of parts of Ukraine and support for breakaway pro-Russian entities in the east of the country. “The Russian Federation provides support to its compatriots living abroad in the fulfilment of their rights, to ensure the protection of their interests and the preservation of their Russian cultural identity,” the policy said. It said that Russia’s ties with its compatriots abroad allowed it to “strengthen on the international stage its image as a democratic country striving for the creating of a multi-polar world.” Putin has for years been highlighting what he sees as the tragic fate of some 25 million ethnic Russians who found themselves living outside Russia in newly independent states when the Soviet Union collapsed in 1991, an event he has called a geopolitical catastrophe.
    Russia has continued to regard the former Soviet space, from the Baltics to Central Asia, as its legitimate sphere of influence – a notion fiercely resisted by many of those countries as well as by the West.

    Of course Russia is far from democratic and this abuse of the word “humanitarian” is pathetic since Putin is a war criminal. But maybe manly man has not figured out his pathetic army is bogged down in Ukraine taking enormous losses. The idea that Putin can lead a retaking of Eastern Europe is truly the dumbest thing ever. Someone in the Kremlin for the good of Russia should take this deranged war criminal out.

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