Be aware of risk and liquidity premiums when extrapolating inflation expectations from break-even points.
figure 1: The five-year inflation break-even point is calculated as the five-year TIPS yield minus the five-year TIPS yield (blue), adjusted by the five-year inflation risk premium and the liquidity premium per DKW (red, left scale). The annual break-even point, both expressed as a percentage. Source: Treasury via FRED, Treasury, Kevin Following data accessed by D’amico, Kim, and Wei (DKW) on 3 August 2023 and author’s calculations.
figure 2: The 10-year inflation break-even point is calculated as the 10-year Treasury bond yield minus the 10-year TIPS yield (blue), and the 10-year break-even point is calculated as inflation risk premium and liquidity premium per DKW (red, left scale ) adjustments, expressed in %. Source: Treasury via FRED, Treasury, Kevin Following data accessed by D’amico, Kim, and Wei (DKW) on 3 August 2023 and author’s calculations.
image 3: The three-year inflation break-even point is calculated as the 30-year treasury bond yield minus the 30-year inflation-protected bond yield (blue), and the unit is %. Source: Treasury via FRED, Treasury, and author’s calculations.
Although the break-even point has declined since the end of 2022, expected inflation remained fairly high as of the end of June.
