With another record high in gold and the slightly higher than expected headline CPI reading, the implied inflation rate in the 5 year TIPS has risen 6 bps today to 1.55%, the highest level in 3 months. Expectations in the 10 yr TIPS are up 3 bps to 1.86%, the most since August 21st. One year ago pre Lehman, the 5 year implied rate was also around 1.55% (deflation was priced in during the Oct thru Dec time period). One year ago, 10 year expectations were about 1.95%. Going a bit further back for more perspective, before the world changed, 5 year expectations got as high as 2.73% and 10 year expectations were at 2.6% both in early July ’08 so there is thus room for higher implied inflation rates IF the move higher in gold is correctly discounting pricing instability in the future.

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