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Near-term Inflation Expectations Fall to Zero

May 24th, 2010 Michael McDonough

One year inflation expectations, as tracked by the breakeven rate for U.S. Treasury Inflated Protected Securities (TIPS), have fallen to almost 0%, while the more often quoted two year rate plummeted to 0.7% (see chart).  While longer-term inflation expectations have diminished, albeit at a much smaller magnitude, the spread between 2Y and 5Y rates has widened to 90bps from just 20bps a month ago.  Diminishing short-term inflation expectations are a product of traders’ flight to quality leading to among other things falling commodity prices.   While short-term breakeven rates will likely remain under pressure as long as developments in Europe control the market; a mounting economic recovery in the U.S. should make it very difficult for short-term breakevens to remain this low indefinitely. 

Source: Bloomberg

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