Market-implied expectations for inflation over the next 10 years are slipping closer to 2% amid renewed confidence that the Federal Reserve will manage to control price gains in the long run.
The 10-year breakeven rate was roughly 2.16%, little changed versus Wednesday’s level and down from 2.5% in October. The rate is calculated by taking the level of the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
and then subtracting the rate on 10-year Treasury inflation-protected securities, which was 1.966% as of 3 p.m. Eastern time on Thursday — one of the lowest levels since September, according to Tradeweb data.
The issue of whether inflation can be successfully contained by policy makers is seen as the biggest question facing financial markets right now.
On one side of the debate are analysts who hold the view that inflation should keep falling as consumers stop spending on the same things at the same time, as they’ve done during the pandemic-era with goods and then services. On the other side is the fact that neither markets nor the Fed have a very good record of predicting inflation, and that progress has been slow in bringing price gains back down to more normal-looking levels.
“The fact that the 10-year breakeven rate was anchored near 2.5% for so long during this cycle tells you what market expectations have been,” said Kathy Jones, chief fixed income strategist at Charles Schwab in New York. “While the lack of liquidity can distort breakevens to some extent, the 10-year breakeven now reflects expectations that we will get to a long-term equilibrium level of inflation that’s roughly around that 2% area.”
Via phone on Thursday, she said that “I think we are on the other side of this inflation story, and feel pretty good about our forecast that inflation is not set to reaccelerate. I never bought into the idea that it had to be persistent and sticky, and have never seen any empirical evidence to support that.”
See also: The ‘great inflation surge’ will end in 2024 and rates will fall nearly everywhere, says Capital Economics and One economist’s theory on why consumers are still so grumpy: They’re stuck in the past.
In her fixed income outlook for 2024, released on Wednesday, Jones wrote that Schwab expects bond yields to decline in line with falling inflation and slowing economic growth, and that uncertainty about the Fed’s policy moves will likely be a source of volatility.
The next major U.S. inflation report, the November consumer-price index, will be released next Tuesday.
Inflation as measured by the CPI’s annual headline rate has remained stuck at or above 3% for five straight months through October. In addition, the Fed’s preferred inflation gauge, known as the core PCE, was still around 3.5% across the 12-month period that ended in October.
On Thursday, Treasury yields finished mixed ahead of Friday’s November nonfarm payrolls report, with the 10-year rate at 4.129%. Meanwhile, all three major stock indexes
DJIA
SPX
COMP
ended higher.
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