Commodities Surge Pushes Gauge of Inflation Bets to New Milestone

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Surging commodity prices have pushed market-based inflation expectations to their highest level in records going back nearly two decades, accomplishing what months of high inflation data couldn’t.

The gap between 10-year nominal and inflation-protected Treasury yields—known as the 10-year breakeven inflation rate—settled at 2.788 percentage points Monday, surpassing the previous closing high of 2.773 set in May 2004, according to Tradeweb.

The breakeven rate is a rough indication of investors’ annual inflation expectations over the next decade, showing the annual increase in the consumer-price index necessary for inflation-protected securities, or TIPS, to deliver the same return as ordinary Treasurys. It climbed again on Tuesday, reaching 2.903 before falling back to 2.875 in recent trading.

Breakeven rates, notably, only cover an era of relatively modest inflation – with data going back as far as 2003, when the US government first started issuing 10-year TIPS four times a year.

Rising inflation expectations are likely to catch the attention of Federal Reserve officials, who are poised to start raising short-term interest rates at their policy meeting next week.

Also of note: The yield on 10-year TIPS, a measure of so-called real yields—the return on bonds after accounting for inflation—has fallen sharply as the breakeven rate has increased, standing recently at minus 1.027%. Low real yields typically are associated with loose financial conditions, the opposite of what would slow inflation. However, financial conditions have tightened in other ways recently, thanks in part to a selloff in riskier assets like stocks.

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