Inflation breakeven
Fixed IncomeDefinition
Difference between nominal Treasury yields and real (TIPS) yields at the same maturity. Represents the inflation rate at which holding TIPS would deliver the same return as nominal Treasuries.
5Y breakeven and 10Y breakeven are the most-watched. Used as a market-based forecast of average inflation. Caveat: includes a small inflation-risk premium and TIPS liquidity premium that bias the reading slightly.
5Y breakeven and 10Y breakeven are the most-watched. Used as a market-based forecast of average inflation. Caveat: includes a small inflation-risk premium and TIPS liquidity premium that bias the reading slightly.
Formula
Breakeven = Nominal yield − TIPS yield
Example
10Y nominal at 4.2%, 10Y TIPS at 1.9% → breakeven of 2.3%. Markets pricing 2.3% average annual inflation over the next decade.