Never Mind The Fed: Here’s Where Investors Think Inflation Is Headed Next

Never Mind The Fed: Here’s Where Investors Think Inflation Is Headed Next
Stéphane Renevier, CFA

almost 2 years ago1 min

As an investor, it’s useful to keep an eye not just on how fast prices are rising, but on how fast investors think they’ll rise. To do that, you just need to look at the “breakeven inflation rate”: the average inflation rate investors are expecting over the next 10 years, based on the difference between the yields of a 10-year government bond and a 10-year Treasury inflation-protected security (TIPS).

The breakeven rate generally doesn’t stray too far from the Federal Reserve’s 2% long-term inflation target, not least because the Fed is pretty good about lowering interest rates when inflation is too low and raising them when it’s too high. So it was slightly worrying when the breakeven rate touched a record high of 3% last month.

The good news is that it’s since dropped down to a more modest 2.7%. That’s still above the Fed’s 2% target, sure, but the fall shows a broader expectation that the current pace of inflation is going to mellow. And if it does, the Fed will be able to ease up on these rate hikes, taking some of the pressure off stocks and the economic world at large.

Of course, these are ultimately just expectations: there’s still a risk that investors are wrong, and that inflation will prove stickier than expected. But the market is built on expectations, which is why keeping an eye on the breakeven rate (updated here) might help inform what the market will do next – and what you can do first.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG