Taken from the difference between the yield on the ten-year Treasury and the yield on ten-year TIPs, the break-even rate of inflation offers us a rough look at what type of annual price increases investors are expecting over the next ten years because the smaller yield on TIPs indicates how much Treasury buyers are willing to give up in order to get inflation protection.
The chart above shows the recent rollover in inflation expectations, with the rate falling from an already modest 2.64% seven weeks ago to 2.22% on Wednesday.
Blame the recent slowdown in the economy for much of the drop in yields.
Jobless claims remain elevated, housing prices are still falling, both manufacturing and service sector growth has slowed and ADP reported a much smaller-than-expected rise in May payrolls on Wednesday.
Further, the renewed interest in longer-term Treasuries comes amid the impending end of QE2 in about four weeks, as well as the looming default deadline in early August.
Clearly, investors don’t seem to be worried about a default and believe Congress and the president will reach an agreement at the eleventh hour.
Moreover, nagging fears that the USA may eventually lose its coveted AAA rating doesn’t seem to be diminishing the appetite for low-yielding US debt.
Commodity prices have surged, and core inflation has starting ticking higher. We’ve also heard plenty of anecdotal stories of companies starting to pass along higher costs.
Still, demand in general has been subdued, making it difficult to boost prices at a more robust pace.
Additionally, unit labor costs – the largest expense for most businesses – remains under control, which is also leading to increased confidence we won’t be seeing any burst of inflation in the near term.
0 comments:
Post a Comment