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NEW YORK: A surge in the bond market’s best gauge of how much inflation investors expect in the years ahead could be underestimating how long the economic shock from the pandemic will last, even if the new Joe Biden administration pushes its proposed massive stimulus package through Congress quickly.

Investors have piled into U.S. 10-year Treasury Inflation Protected Securities (TIPS), driven by expectations of an economic recovery, continued fiscal support from Congress and steady monetary accommodation from the Federal Reserve. That has pushed TIPS yields lower and lifted the implied inflation rate at which an investor would break even buying either an inflation-adjusted 10-year note or normal 10-year Treasury debt.

The U.S. 10-year inflation breakeven rate, the yield difference between 10-year Treasuries and 10-year TIPS, rose to 2.113% on Tuesday, the highest in more than two years, climbing more than 45 basis points since early November.

The TIPS breakeven shows that investors expect inflation to average 2.1% a year over the next 10 years.

U.S. 10-year breakeven inflation rate https://fingfx.thomsonreuters.com/gfx/mkt/rlgvdgogrpo/US%20inflation%20breakeven.PNG

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