US Inflation and Treasury Inflation Protected Securities (TIPS)

An interesting little bit of research that we looked at this morning.

US "breakeven" rates of inflation are used to gauge investor expectation of inflation and are calculated as the yield on a conventional US Treasury less the Yield on an Inflation Protected Treasury (TIPS) of the same maturity. 

Currently 5 year inflation expectations are: - 

• Yield on 5 Year Treasury = 1.76% 
• Yield on 5 Year TIPS = 0.054% 
• Breakeven/Inflation Expectations = 1.76-0.054 = 1.706% 

This is telling us that the current 5 year implied rate of inflation is expected to be 1.706% in the US; if we then look at history we can see that over the long run inflation has tended to be a bit higher. 

So if we were to see a reversion to mean of US CPI (inflation) which is higher than the expected inflation of 1.706% then this may be positive for TIPS. Of course in the World of QE and financial repression these indicators could give conflicting signals for some time - never the less it will be interesting to see.  

Please note this is just a review of market conditions and is not a recommendation!!