US Inflation expectations
5Y Breakevens
5y5y Forward
10-year Real Yield
Insights
CONCEPT
We track market expectations on US inflation using: (1) the 5-year inflation breakevens, which represent the expected average US inflation over the next 5 years; (2) 5y5y forward, which shows the expected average 5-year inflation in 5 years from now and measures the market's faith in the FED to keep inflation on target; (3) 10-year real Treasury yields (= nominal yields less breakevens), which measure the "safe" hurdle rate available for investors after inflation.
CURRENT READINGS
- Investors currently expect US inflation to run at around 2.7% in the near future (ELEVATED). With 5y5y forwards at 2.26% (ON TARGET), markets maintain faith in the FED ability to keep it on target in the long term.
MARKET IMPLICATIONS
Cartesio triangulates those inflation expectations with long term US real yields, now at 1.96% (ELEVATED) to assess what's the upcoming environment priced-in by investors: healthy disinflation that should support the economy and benefit both stocks and bonds.
Real long-term Treasury yields measure the inflation-adjusted returns available to investors. Those returns from US Treasuries are considered safe, easy to get. When real yields are high and rising - on the back of central bank hikes or inflation falling faster - investors will be tempted to shift away from stocks toward fixed-income higher returns. This is true unless equity earnings or expected growth will continue to make stocks appealing, despite the higher real yields. Lower real yields will instead push investors to own more stocks and leave the unappealing Treasury market.