This Isn’t Inflation’s TIP-ping Point
There are reasons to expect more inflation, but don’t take the surge baked into Treasury inflation-protected securities too literally
By Justin Lahart
There are rising expectations for how quickly the economy will recover from the Covid-19 crisis. / PHOTO: PATRICK T. FALLON/BLOOMBERG NEWSThe Treasury market is implying substantially more inflation over the next decade than it did in the fall.
That rise may have as much to do with investors worrying less that the world is about to fall apart than a belief that inflation is headed inexorably higher.
The 10-year break-even rate, or the difference between the yield on the 10-year Treasury note and the 10-year Treasury inflation-protected security, is often looked at as bond-market investors’ judgment of where inflation is headed.
It now stands at 2.2 percentage points, a half-point above its level at the start of
November and near its highest since 2014.
There are some good reasons for thinking inflation over the long haul might be higher than one would have thought back in the fall.
With millions of Americans getting vaccinated each week and another round of government support on its way, expectations for how quickly the economy will recover from the Covid-19 crisis have stepped up.
Even so, the Federal Reserve has remained steadfast about its intention to get inflation a bit above its 2% target—and not just for a little while, as seems possible in the early stages of reopening the economy.
Forecasters, Wall Streeters and ordinary Americans never had inflation projections quite as low as what the break-even rate implied through much of last year.
By the same token, while they have nudged up their expectations for what inflation will do over the next decade, they haven’t done so by nearly as much.
A Federal Reserve Bank of Philadelphia survey shows that, as of this quarter, economists expect the Labor Department’s measure of consumer inflation to average 2.2% over the next decade, versus an estimate of 2.12% last quarter.
A Federal Reserve Bank of New York survey in January showed that bond-market participants expect inflation of 1.95% over the next five years, and 2.14% in the five years after that, which compared with October estimates of 1.85% and 2.1%, respectively.
And in the University of Michigan’s February survey of consumers, respondents said they expected inflation to average 2.7% over the next 5 to 10 years, which was close to its fall readings.
The bigger factor in the rise in the break-even rate seems to be an increase in term premiums, not higher expected inflation.
Term premiums are essentially the extra yield investors demand over what they think is appropriate for a Treasury to compensate for the possibility their view is wrong.
“Premium,” has become a bit of a misnomer, because while historically term premiums have been positive, in recent years they have often been negative.
That may be because rather than worrying about 1970s-style inflationary shocks sending rates unexpectedly higher, investors now worry more about recessionary shocks that the Fed struggles to dig the economy out of.
Term premiums aren’t directly observable, but economists have come up with models to infer them.
These show that, while the term premiums remain negative, they aren’t as negative as they were back in the fall.
A Federal Reserve Bank of New York model, for example, shows a term premium on the 10-year Treasury of negative 0.34% versus negative 0.75% at the end of October.
That less negative term premium makes for higher Treasury yields and a higher break-even rate.
A future with a bit more inflation certainly seems likelier now than it did in the fall, when the possibility of effective vaccines still seemed murky.
But the more important message from the bond market is that the world seems a little less fraught now than it did then.
0 comments:
Publicar un comentario