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Maybe Treasury Inflation Protected Securities are the Place to be Again

As far as managing longish-term, market-implied expectations go, the Fed could declare victory now. The 5-year forward 5-year breakeven inflation rate computed using Treasury Inflation Protected Securities (TIPS) and Nominal bonds, has dropped (again) right to the 2% level (of course since the Fed is majority owner of both nominal bonds and TIPS, they can make this number whatever they wish it to be by buying or selling nominal and inflation linked bonds, so this indicator should be taken with a HUGE grain of skepticism).

The recent low of the 5y forward 5y breakeven was about 1.4% at the height of COVID, and the high was 2.4% in early 2022, before the Fed pivoted aggressively to squash inflation and inflation expectations. Recall that during the financial crisis of 2008 TIPS were sold aggressively as both illiquidity and fears of deflation surfaced and drove the forward breakeven down to about 1.5%. TIPS don’t act like Treasuries should when there is a race for the exits.

The full note on this important topic can be downloaded at this link: LTA Thinking – Maybe Treasury Inflation Protected Securities Are The Place To Be Again