Inflation expectations are collapsing, and the bond market is saying so clearly. Interest rates are stable, and the message coming out of the bond market is stable to lower. I think rates continue lower from here, because inflation is going lower and the oil price is going with it.
Here is the number that matters. One-year breakeven rates in the TIPS market were at 5.3% a couple of months ago. They are now below 3%. That is the market’s own priced expectation for inflation, and it has more than halved in a matter of weeks. So anybody telling you that inflation expectations are rising is, in my experience, talking their own book. I do not believe it, and the numbers do not support it.
I am a bond nerd. I started in this business as a bond trader and spent eight years trading Treasuries in New York, London and Tokyo, so I read bond market messages first and most closely, and I read them as a skeptic. The other signal I watch is the Fed, which statistically is still in easing mode. That is the first algorithmic green light anybody gets, and it is still on.
My view is that inflation keeps falling and rates go below where they are now. That is a view, not a promise, and I could be wrong on it if oil turns or the data breaks the other way. But I would rather work from what the market is actually pricing than from what the commentary insists it should be pricing.
