TIPS Auction Points to Inflation Below Fed Target for Decades

This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.

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(Bloomberg) — As traders prepare to underwrite $5 billion of inflation-linked Treasuries on Thursday, they’re as confident as ever that the Federal Reserve’s predicted inflation rebound won’t materialize at any point in the next 30 years.

Low inflation, which Fed Chair Janet Yellen last weekend called “the biggest surprise in the U.S. economy this year,” has been a fact of life for years in the $1.29 trillion market for Treasury Inflation Protected Securities. The market-implied inflation expectation signaled by five-year TIPS has rarely been above the 2 percent mark since 2013.

There’s an even stronger signal that traders see little pickup in consumer prices for a generation to come, especially with the Fed intent on tightening monetary policy. The anticipated inflation rate implied by 30-year TIPS yields, at 1.91 percent, is a mere 18 basis points above that on five-year TIPS, among the narrowest gaps seen in the past two decades.

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The bond market’s view shows the Fed has some convincing to do that the economy will reach and sustain officials’ inflation goal of 2 percent, expressed in terms of the deflator for personal consumption expenditures. TIPS reflect expectations for the consumer price index, which historically has exceeded the PCE deflator by about 40 basis points on average. So if the Fed were expected to meet its goal, the TIPS breakeven rate should be at least 2.40 percent.

The TIPS breakeven rate is only 1.76%. And has mostly been below 2% since early 2013.

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And with the US Treasury 10 year Note yielding 0.64% in real terms, …

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With almost 100 million people NOT in the labor force, that might have something to do with the puzzling lack of inflation.

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