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Breakeven inflation rates and their puzzling correlation relationships

Author

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  • Gilbert Cette

    (Centre de recherche de la Banque de France - Banque de France, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Marielle de Jong

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 (RBY) and the yield differentials, the Breakeven Inflation Rates (BEIR), 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 article insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.

Suggested Citation

  • Gilbert Cette & Marielle de Jong, 2013. "Breakeven inflation rates and their puzzling correlation relationships," Post-Print hal-01500867, HAL.
    • Handle: RePEc:hal:journl:hal-01500867
    DOI: 10.1080/00036846.2012.671924
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    References listed on IDEAS

    as
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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

    breakeven inflation; Fisher hypothesis; inflation-linked bonds;
    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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