TIPS Tipping Over, But Not That Way

There is precedence for this, though not to this extent; it has reached a record. And when it happened before, oil prices were right in the middle of it, too. The 5-year TIPS breakeven rate has surged to equal its highest in a very long time. Considered by many evidence for an inflationary breakout – these are inflation breakevens, after all, and for an important benchmark, too – there is yet a growing inconsistency to first consider.

Whereas the 5s are at more than decade highs, the 10s are not. Rising still if much less rapidly, this has created an unusual discrepancy. Typically, there is an upward slope to the inflation curve (such that one exists) like any other money or bond curve; the 10s breakevens will be greater than those at maturities less than 10-years. This has been true for the vast majority of Treasury paying inflation protection.

Going back to early January, however, this breakeven situation “inverted” and has only grown more upside down over the weeks since first it developed. As of the past week, it is now inverted by the most in history.

As you can see above, it’s not the only time in trading experience; going back to the middle of the first decade of the 21st century, the blowout 2000’s with its housing bubble and eurodollar monetary explosion both feeding into rapidly rising crude oil prices.

Then, as now, the market was pricing short-term inflationary results as a consequence of rising WTI, but that it wouldn’t alter the longer run inflation picture – expectations, in the parlance of Economics and central bankers, remained well anchored no matter the general commodity frenzy.

But if oil prices didn’t dislodge long run expectations, and they sure didn’t, the first Global Financial Crisis began to, a task ultimately completed in the wake of Euro$ #2; specifically, the misunderstood, misidentified “taper tantrum” period of 2013.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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