One example: in the lead-up to the 2008 financial crisis, when the 5-year breakeven rate shot up to 2.73% amid a housing boom and soaring oil prices. But the rate soon fell off and has largely stayed below that level since.
On Thursday, the New York Fed announced plans to reduce the amount of TIPS it will purchase over the next month. That tweak, along with Treasury’s previously stated plan to boost auctions of TIPS in coming quarters, may help alleviate any near-term shortage of the securities.
For WinShore’s Hu, who trades global inflation-protected securities, next week’s auction is a must-watch event. The last TIPS auction, on April 22, was a sale of 5-year securities for which investor demand was the strongest since 2019.
Hu says many traders are probably “waiting to see if they can buy something cheap” and currently trading in a zig-zag fashion -- purchasing TIPS when breakeven rates narrow and selling when inflation expectations go up.
“We are stuck in a negative feedback loop on inflation, and we could easily have 4%-5% inflation in a year’s time, way more than the market is pricing in,” he said. “We have to throw all our forecasting models for the next three to six months out the window.”
This article was provided by Bloomberg News.