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Breakeven inflation rates and their puzzling correlation relationships

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  • Cette, G.
  • De Jong, M.

Abstract

It is generally assumed that the two Fisher components of the interest rate -the real interest and the inflation- evolve independently over time, considering that they are driven by unrelated economical events. However, the market pricing of those components deduced from newly-available bond data does not provide conclusive evidence. While studying the price behaviour of inflation-linked (real) bonds beside nominal bonds in the major fixed-income markets, we observe that the real bond yields and the yield differentials, the breakeven inflation rates, have the propensity to be positively correlated between each other across the various countries, yet are pushed into a negative correlation relationship due to market-related price distortions. As long as those distortions are local, the net result is near-zero correlation within countries; when they become global, as in the heat of the current crisis, the correlations turn negative worldwide. In this paper insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.

Suggested Citation

  • Cette, G. & De Jong, M., 2012. "Breakeven inflation rates and their puzzling correlation relationships," Working papers 367, Banque de France.
    • Handle: RePEc:bfr:banfra:367
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    References listed on IDEAS

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    Cited by:

    1. Gilbert Cette & Marielle de Jong, 2013. "Market-implied inflation and growth rates adversely affected by the Brent," Journal of Asset Management, Palgrave Macmillan, vol. 14(3), pages 133-139, June.

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    More about this item

    Keywords

    inflation-linked bonds; breakeven inflation; Fisher hypothesis.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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