5Y Breakeven Rate Soars to Highest Level Since 2008 Amid Inflation Fears

It appears that markets are beginning to take the seriousness of impending inflation into account.

The 10Y breakeven rate has thus far remained relatively steady at 2.2%, suggesting that inflation expectations over the next ten years are not yet a cause for alarm. However, the 5Y breakeven rate has just surged above 2.50%, as investors’ inflation expectations over the five year horizon rise to the highest since 2008.

Optimism surrounding the economic recovery has been rising, and as such, financial markets have been strongly fixated on potential indications of an impending reflationary period. Indeed, according to the recent IHS Markit PMI prices reading, cost pressures continue to remain elevated, with the rate of cost-push inflation accelerating by the most since October 2009.

In response, companies have begun raising their prices at nearly the fastest rate on records dating back to more than 11 years ago. Likewise, a similarly dismal print was published by the Service ISM, which saw prices surge by 7.6 points to 71.8 in February.

In short, investors have been on edge over rising prices, and any kind of print that suggests the reflationary period will remain in place for the foreseeable future will cause yields to rise even higher. That is, until the Federal Reserve steps in, which will likely be in the form of some sort of Yield Curve Control.

Information for this briefing was found via FRED, IHS Markit, and ISM Report on Business. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply