10Y TIPS Yield Above 0%; Highest In 19 Months

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...

 

5Y 5Y Forward inflation expectations...

 

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...

 

 

Charts: Bloomberg