A byproduct of the Fed bond-buying is that it may have artificially boosted breakeven rates, a widely followed proxy for inflation expectations. The 10-year breakeven rate -- calculated by subtracting TIPS yields from nominal yields -- is around 2.3%, after reaching a roughly eight-year high of almost 2.6% in May.
“True” inflation expectations are between 1.8% and 1.9% after stripping out the liquidity premium caused by the Fed’s purchases, Deutsche Bank AG strategist Steven Zeng wrote in a Sept. 10 note. That premium may fade quite slowly: If the TIPS market grows at its current rate, it would take 12 years for the Fed’s share to retreat to pre-pandemic levels, by Deutsche’s calculation.
James Athey, who manages $5 billion in fixed-income assets at Aberdeen, said he’s betting that real yields will rise as the Fed pulls back from the market at a time when investor positioning in TIPS is still crowded.
“Heavily distorted” by the Fed, TIPS will “suffer as the result of the taper,” he said.
--With assistance from Elizabeth Stanton, Liz Capo McCormick, Benjamin Purvis and Vildana Hajric.
This article was provided by Bloomberg News.