Last updated: December 7, 2023 at 4:02 PM ET
First Published: December 7, 2023, 1:42pm ET
Implied market expectations for inflation over the next 10 years are falling to near 2% amid renewed confidence that the Fed will be able to control long-term price gains.
The 10-year breakeven rate was about 2.16%, little changed from Wednesday’s level, and down from 2.5% in October. The rate is calculated by taking the yield level on the benchmark 10-year Treasury note BX:TMUBMUSD10Y and then subtracting the rate on the 10-year Treasury Inflation-Protected Bond, which was 1.966% as of 3 p.m. ET…
Implied market expectations for inflation over the next 10 years are falling to near 2% amid renewed confidence that the Fed will be able to control long-term price gains.
The 10-year breakeven rate was about 2.16%, little changed from Wednesday’s level, and down from 2.5% in October. The rate is Calculated by taking The benchmark 10-year Treasury yield level BX:TMUBMUSD10Y then subtract the rate on 10-year Treasury inflation-protected notes, which was 1.966% as of 3pm ET on Thursday — one of the lowest levels since September, according to Tradeweb data.
The question of whether inflation can be successfully contained is viewed by policymakers as an ideal solution The biggest question facing the financial markets currently.
On one side of the debate, there are analysts who argue that inflation should continue to fall as consumers stop spending on the same things at the same time, as they did during the pandemic with goods and then services. On the other hand, there is the fact that neither markets nor the Fed have a very good record of forecasting inflation, and progress has been slow in returning price gains to levels that appear to be more normal.
“The fact that the 10-year breakeven rate has been flat near 2.5% for so long during this cycle tells you what the market expectations have been,” said Cathy Jones, chief fixed income strategist at Charles Schwab in New York. “While liquidity shortages can distort breakeven points somewhat, the 10-year breakeven point now reflects expectations that we will reach a long-run equilibrium level of inflation roughly in the 2% region.”
“I think we are on the other side of this inflation story, and we feel good about our outlook that inflation is not expected to accelerate again,” she said by phone on Thursday. “I’ve never bought into the idea that it should be flat and sticky, and I’ve never seen any empirical evidence to support that.” .
See also: The “surge in inflation” will end in 2024 and interest rates will fall almost everywhere, say Capital Economics and one economist’s theory on why consumers are still angry: They’re stuck in the past.
In which Fixed income forecasts For 2024, released Wednesday, Jones wrote that Schwab expects bond yields to fall in line with lower inflation and slower economic growth, and that uncertainty about the Fed’s policy moves will likely be a source of volatility.
The next major US inflation report, the November CPI, is due next Tuesday.
Inflation, measured by the annual headline CPI rate, remained stuck at or above 3% for five straight months through October. In addition, the Fed’s preferred measure of inflation, known as core personal consumption expenditures, remained around 3.5% during the 12-month period ending in October.
On Thursday, Treasury yields finished mixed ahead of Friday’s November nonfarm payrolls report, with the 10-year interest rate at 4.129%. Meanwhile, all three major stock indices DJIA SPX COMP ended higher.