Spreads diverge as the break-even point drops to inflation

Significant daily movement in 10 year and 5 year returns:

Figure 1: 10 years – 3 months treasury spread (blue), 10 years – 2 years (red), treasury bonds – 5 year stiff (green). Light blue dashed line in the income and expense statement for June. Source: Treasury via FRED and author accounts.

The difference between 10 years and 3 months has increased, while inflation expectations in the medium term have eased. The real five-year rates are back in positive territory. If the liquidity and risk premium were constant, I think expectations for economic activity would have risen; But this will go a bit too far.

This entry was posted on by Minzy Chen.

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