Breakeven ‘Overshoot’ Belies Lingering Disinflationary Probability, One Bank Says

Breakeven ‘Overshoot’ Belies Lingering Disinflationary Probability, One Bank Says

Is the move in breakevens overdone? One bank thinks the answer is "maybe." If you don't know the context (and perhaps even if you do) this isn't the most exciting debate in the world. But it is important to the overall market narrative. Breakevens breached 2% for the first time since 2018 recently, as the reflation trade gathered steam. Since the March 2020 collapse, breakevens have risen pretty much in lockstep with equities, and, in turn, real rates in the US were driven deeply negative.
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2 thoughts on “Breakeven ‘Overshoot’ Belies Lingering Disinflationary Probability, One Bank Says

  1. I’m just a nut in the peanut gallery who don’t know squat. For me, the relentless march higher in real rates is my biggest surprise since the summer.

    I suspect the playbook will be…real rates go up to some threshold…algos kick in and do what they do…equities tank 20%…Fed quells markets with words or promises to purchase…equities pursue relentless move higher. Or, the Fed might pre-empt the whole thing and make purchases to put a lid on it before something breaks. Or, there is a spasm of disinflationary pressure with all the upcoming bankruptcies in commercial real estate and whatever other bad news is sure to emerge, the whole reflation trade unwinds in a week, the world looks like it’s coming to an end to mark the 1-year anniversary of March 2020, real rates end up back at 0.6%, and by June, equities and the reflation trade begin afresh.

    …jeez, that TLT chart. Or, maybe just embrace the new world of higher yield. I’m going to call my S&L and buy some CDs to lock in the killer yield on my cash.

  2. Worth noting that the US breakeven curve is inverted, with 2yr inflation expectations now well above 5s and 10s. This potentially suggests to me that much of the move is driven by base effects, WTI crude and other commodities rather than long term demand side inflation pressures. I’m also not sure if historically (in the post TIPS era) the inversion has ever been resolved by forward breakevens catching up to short end breakevens (rather the entire breakeven curve has tended to roll over).

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