Monday, November 26, 2018

"Brief TIPS Market Comment"

From Bond Economics, Nov. 25 (also on blogroll at right):

Brief TIPS Market Comment

Chart: 10-Year U.S. Breakeven Inflation Rate
The U.S. inflation-linked bond (TIPS) market is in an interesting position right now. Inflation protection seems cheap, but the question always remains: is it cheap for a reason? Unfortunately, I am not able to answer that question, I am going to just briefly outline the debate.

The chart above shows the 10-year (simple) inflation breakeven, which is calculated by subtracting the quoted yield on a 10-year TIPS (the "real yield") from the conventional 10-year Treasury nominal yield. We can see that the breakeven has dipped below 2%, but it is well above the 2016 lows.

My recently released book (although still waiting on paperback) Breakeven Inflation Analysis offers a comprehensive intermediate level analysis of the properties on breakeven inflation rates.  One of the recurrent themes within the book is the importance of oil prices for breakeven inflation. Most economists normally focus on core measures of inflation (inflation rates excluding food and energy), but the return on TIPS is based on all items (headline) CPI inflation.
Chart: West Texas Intermediate Oil Price
Recent developments in the oil markets help explain the dip in breakeven inflation. Oil prices are certainly not conforming to the usual pattern of firming during an expansion (figure above). This will certainly have a mechanical dampening effect on headline inflation....

Nov. 23 
"Stock Market Off Lows, But Crude Oil Prices Plunge To New Depths"
Today's markets are all about oil. Let's see how it's doing, shall we?

Oh Dear God:
$50.95, down $3.68 (6.74%)
Nov. 20
Eurodollars and Oil (crude decline means lower inflation which means....Yikes)
Feb. 2016
You Want Inflation, "Why doesn’t the ECB just buy oil?"