Five-year breakevens continue to bleed lower, signaling the Federal Reserve needs to be on guard against disinflation.
The measure of Treasury yields versus TIPS is down another 4 basis points today to 1.31%. A close at these levels would be the lowest since 2010.
In October, the Fed’s Bullard expressed concern about low breakevens and said the Fed could continue QE. That was when 5-year breakevens were at 1.45%.
US 5 year breakevens
The kneejerk reaction is to point to low oil prices as a ‘one off’ effect but even if that means inflation is 0.9% next year, the effect would only last for a year.
Stretching out to 10-years, breakevens are down to 1.72%.
I think what the bond market is beginning to signal is that the Fed will raise to 1.00%-.00% in the year ahead to minimize financial risks but that disinflation could be the trade off.
