Read on Twitter
#DiveIn: #Inflation Breakevens (BE)
Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:
BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)
1/8
https://twitter.com/VaradMarkets/status/1358019916075388928?s=20
Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:
BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)
1/8
https://twitter.com/VaradMarkets/status/1358019916075388928?s=20
BE = inflation level that makes investor indifferent b/w buying UST or TIPS
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI
10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%
2/8
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI
10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%
2/8
Breakevens (from TIPS) actually do not capture pure inflation expectations
Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP
TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP
BE = N – R = IE + IRP – LP <> IE
3/8
Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP
TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP
BE = N – R = IE + IRP – LP <> IE
3/8
- IRP = Inflation Risk premium, especially in long end of curve = fear of higher-than-expected inflation
- LP = Liquidity Premium, extra illiquidity cost in TIPS market
BE also implied from Zero Coupon Inflation Swaps (IS)
BE = [(IS maturity / IS inception) ^ (1/n)] - 1
4/8
![- IRP = Inflation Risk premium, especially in long end of curve = fear of higher-than-expected inflation- LP = Liquidity Premium, extra illiquidity cost in TIPS market BE also implied from Zero Coupon Inflation Swaps (IS)BE = [(IS maturity / IS inception) ^ (1/n)] - 1 4/8](https://pbs.twimg.com/media/Etj19XKUcAAfUkt.jpg "- IRP = Inflation Risk premium, especially in long end of curve = fear of higher-than-expected inflation- LP = Liquidity Premium, extra illiquidity cost in TIPS market BE also implied from Zero Coupon Inflation Swaps (IS)BE = [(IS maturity / IS inception) ^ (1/n)] - 1 4/8")
- LP = Liquidity Premium, extra illiquidity cost in TIPS market
BE also implied from Zero Coupon Inflation Swaps (IS)
BE = [(IS maturity / IS inception) ^ (1/n)] - 1
4/8
Participants in TIPS Market
* Main Seller
- US Govt Auction (usually third Thursday every month)
* Others
- Real Money and Hedge Funds – view on BE, curve play
- Foreign Investors – generally outright buyers
Long Inflation = Buy TIPS + Sell Treasury UST =
Real + 
Nominal
5/8
* Main Seller
- US Govt Auction (usually third Thursday every month)
* Others
- Real Money and Hedge Funds – view on BE, curve play
- Foreign Investors – generally outright buyers
Long Inflation = Buy TIPS + Sell Treasury UST =
Real + Nominal5/8
Inflation v/s Oil:
Chart: 3y US CPI Inflation Swap v/s Brent Oil
- Oil yet to catch up?
6/8
Chart: 3y US CPI Inflation Swap v/s Brent Oil
- Oil yet to catch up?
6/8
Market Based measure v/s Survey Based measure (Fed looks at both):
Chart: US Inflation Forward Breakeven 5y5y v/s U Michigan 5-10y Inflation Expectations
- Survey based measures generally more sticky
https://twitter.com/VaradMarkets/status/1350516108588056576?s=20
7/8
Chart: US Inflation Forward Breakeven 5y5y v/s U Michigan 5-10y Inflation Expectations
- Survey based measures generally more sticky
https://twitter.com/VaradMarkets/status/1350516108588056576?s=20
7/8
- Please direct message if you wish to discuss more details
- Please share/retweet if you think this can benefit wider audience
@chigrl @bondstrategist
8/8
- Please share/retweet if you think this can benefit wider audience
@chigrl @bondstrategist
8/8
