Bond Market Chart Watch

 

INFLATION AND TREASURYS

Maintaining expectations of low and stable inflation is one key goal of monetary policy. To assist in monitoring inflation expectations, the Fed is following implied inflation derived from spreads between nominal and Treasury Inflation Protected Securities (TIPS).

An inflation-indexed security provides a "real" return; a return in addition to the rate of inflation if it is held to maturity.

Chart B0596 shows yields of 5-, 7-, 10-, 20-, and 30-year inflation-indexed Treasurys.

The chart the Fed is really watching is 5-year implied inflation rate and 5-year inflation expectations five years ahead, or what we call 5-year implied forward inflation.

The implied inflation rate is the average inflation rate derived from the TIPS market over the next 5 years. The inflation rate is calculated by subtracting the TIPS yield from the regular Treasury coupon yield. The implied forward inflation rate also comes from the TIPS curve, but measures the expected 5-year inflation rate 5 years from now.

Chart B0596B shows the 5- year implied inflation vs 5-year implied forward inflation in the top clip and similar calculations for the 10-year Treasury in the bottom clip.

Chart B0596A shows the breakeven curve (implied inflation) for the 5-, 7-, 10-, 20- and 30-year TIPS.

Chart  B0596C plots TIPS vs nominal treasury yields by maturity.

Chart B0596D plots the 10-year zero coupon inflation swap vs the 10-year breakeven yield and 5-year implied forward inflation.

Chart  B0596E plots TIPS vs breakeven yields by maturity.

Chart B0541 plots the real yield curve - current, 6 months, and 1 year prior, using yields from the Treasury Inflation Protected Securities Curve.

Chart B191 shows 5-year government inflation-linked bond yields for the U.S., U.K., France, Canada, and Japan.