We track where the market thinks US inflation is heading using three key gauges: (1) The 5-year inflation breakevens - the market’s bet on average EU inflation over the next 5 years; (2) The 5y5y forward - what the market expects 5-year inflation to look like 5 years from now, showing the market’s long-term faith in the Fed; (3) 10-year real Treasury yields (nominal yields less breakevens) - the "safe" hurdle rate available for investors after inflation.
CURRENT READINGS
Investors currently expect US inflation to run at around 2.3% in the near future (AROUND TARGET). With 5y5y forwards at 2.23% (ON TARGET), markets maintain faith in the FED's ability to keep it on target long term.
MARKET IMPLICATIONS
Cartesio pairs these inflation expectations with long-term US real yields, now at 2.23% (HEADWIND), to decode what the market is pricing in: 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. When real yields are high and rising—due to central bank hikes or falling inflation—investors are tempted to shift away from stocks toward fixed-income. Conversely, lower real yields push investors to own more stocks as Treasuries become less appealing.