Given the signs of tightening in the Fed’s statement – including interest rates and policy tapering – it was surprising that the inflation breakeven point was little changed. On the other hand, 5-year TIPS rose 13 basis points.
figure 1: The five-year inflation breakeven is calculated as the 5-year Treasury minus the 5-year TIPS (blue, left scale) and the 5-year TIPS yield (red, right scale). Source: Federal Reserve via FRED, Treasury, author’s calculations.
Consistent with the interpretation of future rate changes, the 10-year to 3-month term spread has trended sideways, while the 10-year to 2-year term spread has narrowed (i.e. a flattening of the yield curve for maturities above 2 years) .
figure 2: 10-year-3-month Treasury spread (blue) and 10-year-2-year Treasury spread (red). Source: Federal Reserve via FRED, Treasury, and authors calculations.
There is no inversion yet, but a flattening does point to slower growth.
