Inflation Expectations At Five-Year Low

One of the key indications of the market’s inflation expectations is the gap between yields on 10-year Treasury notes and Treasury Inflation Protected Securities, known as TIPS.

This gap represents the rate of inflation that investors in the $515 billion market expect over the life of the debt. TIPS pay investors a coupon plus the rate of inflation as measured by the government’s consumer price index, effectively eliminating any erosion in the return on fixed-income securities caused by price inflation.

The gap between regular 10-year Treasurys and TIPS yields has fallen to 1.93%, a level not seen since 2003. The drop in commodity prices, chiefly oil, is being interpreted as easing pressure on virtually all other kinds of prices.

Source: Marketwatch

HT: Clover Aguayo

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