After 19 months in the red, yields on the 10Y TIPS have just shifted into positive territory. We saw a similar surge in TIPS yields in Q4 2010 / Q1 2011 which did not end well for stocks. This comes along with the simultaneous drop in the Fed's inflation gauge - five-year forward breakevens - which is now at its lowest in 9 months. This kind of drop has previously led to further QE action by the Fed, and right on cue...
- *BULLARD SAYS INFLATION IN U.S. HAS `SURPRISED TO THE DOWNSIDE'
- *FED'S BULLARD SAYS LOW INFLATION MAY WARRANT PROLONGING QE
- *BULLARD SAYS HE'S STILL OPTIMISTIC U.S. INFLATION WILL RECOVER
As Barclays notes:
Ultimately, we think breakevens, particularly forwards, are a buy. We believe the Fed’s reaction function has not become more hawkish and that the market has missed that tapering is conditional on a strong economy.
10Y TIPS yield...
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5Y 5Y Forward inflation expectations...
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The embedded par floors in TIPS have not richened as they have in past episodes of market stress suggesting this move is more a shift in fundamental sentiment that technical/flow driven...
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Charts: Bloomberg