Surging US Breakeven Rates Signal Potential Yield Pressure Amid Rising Inflation Expectations
The US two-year breakeven rate is surging, which will likely push yields higher. Inflation expectations are on the rise, indicating that the Fed's efforts to curb inflation might not be as effective as anticipated. Apollo Management Chief Economist Torsten Slok cautioned bond investors that the US economy is gaining momentum, accompanied by an increase in underlying inflation, which could deter the Federal Reserve from lowering interest rates in 2024.
Recent data illustrate the ongoing struggle of the Fed against inflation, with Core PCE reaching its highest level in nearly a year and both CPI and PPI surpassing expectations. Moreover, the correlation between breakeven rates and yields is strengthening, suggesting that breakevens are gaining more influence over yields, especially evident in the rising correlation between two-year breakeven rates and two-year yields.
According to Bloomberg, the movement of two-year breakeven rates aligns closely with five- and 10-year yields, indicating that the anticipation of higher inflation could lift yields across different maturity periods. Despite today's decline in Treasury yields, it's essential to remain mindful of these risks. Historical trends indicate that rising breakevens preceded significant losses, as seen in 2019, 2020, and 2021, when the Bloomberg US Treasury Total Return Index plummeted by a staggering 12% in 2022, marking its largest decline since 1974.
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