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Free AccessDoes The 5Y5Y Inflation Swap Tell Us Anything About LT Inflation Expectations?
- In the past few months, a rising amount of investors have been concerned that the inflationary pressures in most of the economies will last longer than what policymakers currently expect.
- They often refer to the US 5y5y inflation swap - a market-implied measure of long-term inflation expectations - which has risen significantly in the past year and currently trades at 2.40% (way above Fed's 2-percent target).
- However, we have seen that in past cycle, the 5Y5Y inflation swap has been very sensitive to changes in front-month futures of oil and equity prices.
- The chart below shows the strong co-movement between the annual change in 5Y5Y and annual change in WTI (front month futures).
- In theory, strong moves in equity and oil prices should not impact LT inflation expectations as timely monetary policy readjustments are there to offset those shocks.
- Hence, even though the 5Y5Y inflation swap keeps rising in the coming months, it may not reflect anything about LT inflation expectations.
Source: Bloomberg/MNI
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.