Who's Got The Smallest TIPS?
Yesterday we highlighted that US TIPS securities are trading with negative yields almost 6 years into the future. The chart below shows just how great the confusion is when it comes to estimating inflation based on a comparison between rate-based instruments and other securities, most notably stocks and commodities, which are now pricing in aggressive inflation.
Yet this is nothing, as the next chart demonstrates, compared to the confusion when attempting to quantify European inflation is even worse (that GGB 2.9% of Jul 2025 sure looks like it was priced by a low frequency trading ENIAC).
And lastly: Britain is now expecting inflation to not return for nearly a decade based on TIPS breakevens.
How can one explain this? As Credit Trader suggests, this is nothing more than a simple upside/downside calculation used each and every day to quantify outcome probabilities for asset managers: the market is pricing in a 99% probability of deflation in which rates approach zero as seen on TIPS (although don't tell that to the 30 year auction earlier), and a tiny (but increasing) probability of hyperinflation. Since the U/D equation thus becomes impossible to quantify, as it has either infinity in the numerator or zero in the denominator, the market's schizophrenia is easily explainable: market participants are increasingly hedging for the possibility of a hyperinflation scenario, which unlike a deflationary collapse, does not have a lower bound to exponential price expansion (what is hyperinflation 10,000,000% price increase? 10x10100,000? the distinction is irrelevant, just ask Von Havenstein). So look to TIPS and the bond auctions to determine when the denominator on the deflation scenario starts getting weaker. At that point, gold, and all resource commodities, will likely explode.