Putting Recent Breakeven Increases Into Perspective

• Today’s current 4.5bp rise in the 5Y inflation breakeven to 2.70% (driving a 2.5bp increase in nominal yields) leaves it on track for the fifth consecutive daily increase and up 20bps on a week ago.
• This has taken it back above pre-taper levels of ~2.5%, but having fallen rapidly through June is down 28bps since after the Jun 15 FOMC decision and 45bps since the start of the Ukraine war.
• It lends some support to the recent decline in the U.Mich 5-10Y measure of inflation expectations but not all surveyed measures are falling, with the Atlanta Fed business survey showing a growing share of 31% expecting unit cost growth to average more than 5% over the next 5-10Y.
• The breakeven is still historically elevated but the solid decline has comes as real yields have broadly held onto the ratcheting higher in the build up to the Jun FOMC, with peak hiking fervour hitting just beforehand.
• At 43bps, 5Y real yields have levelled off after a peak of 70bps on Jun 14 but have surged 200bps this year to hold above levels seen for most of 2019.

US 5y breakeven (yellow), nominal yield (white) and real yield (green)Source: Bloomberg