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2 posts on "Breakeven inflation"
July 1, 2024

Exploring the TIPS‑Treasury Valuation Puzzle

Guillaume Roussellet

Decorative image: Treasury Department

Since the late 1990s, the U.S. Treasury has issued debt in two main forms: nominal bonds, which provide fixed-cash scheduled payments, and Treasury Inflation Protected Securities—or TIPS—which provide the holder with inflation-protected payments that rise with U.S. inflation. At the heart of their relative valuation lie market participants’ expectations of future inflation, an object of interest for academics, policymakers, and investors alike. After briefly reviewing the theoretical and empirical links between TIPS and Treasury yields, this post, based on a recent research paper, explores whether market perceptions of U.S. sovereign credit risk can help explain the relative valuation of these financial instruments.

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Posted at 7:00 am in Treasury | Permalink
March 22, 2021

The Persistent Compression of the Breakeven Inflation Curve

Richard K. Crump, Nikolay Gospodinov, and Desi Volker

Breakeven inflation, defined as the difference in the yield of a nominal Treasury security and a Treasury inflation protected security (TIPS) of the same maturity, is closely watched by market participants and policymakers alike. Breakeven inflation rates provide a signal about the expected path of inflation as perceived by market participants although they are also affected by risk and liquidity premia. In this post, we scrutinize the dynamics of breakeven inflation, highlighting some intriguing behavior which has persisted for a number of years and even through the pandemic. In particular, we document a substantial downward shift in the level of breakeven inflation as well as a marked flattening of the breakeven inflation curve.

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Posted at 7:00 am in Expectations, Financial Markets, Inflation | Permalink

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