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The Persistent Compression of the Breakeven Inflation Curve

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Abstract

Breakeven inflation, defined as the difference in the yield of a nominal Treasury security and a Treasury Inflation-Protected Security (TIPS) of the same maturity, is closely watched by market participants and policymakers alike. Breakeven inflation rates provide a signal about the expected path of inflation as perceived by market participants although they are also affected by risk and liquidity premia. In this post, we scrutinize the dynamics of breakeven inflation, highlighting some intriguing behavior which has persisted for a number of years and even through the pandemic. In particular, we document a substantial downward shift in the level of breakeven inflation as well as a marked flattening of the breakeven inflation curve.

Suggested Citation

  • Richard K. Crump & Nikolay Gospodinov & Desi Volker, 2021. "The Persistent Compression of the Breakeven Inflation Curve," Liberty Street Economics 20210333, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:90351
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    More about this item

    Keywords

    breakeven inflation; expected inflation; inflation risk premia;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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