Forecasting Inflation: What Affects TIPS?
Next, let's take a look at 10-year swap spreads, last discussed here in December 2007 in the context of a negative outlook for corporate bonds. These spreads, plotted inversely below, have been compressed recently by the flight-to-quality into 10-year Treasuries, but have been on a secular rise since the mid-2003 low in interest rates. Plus, these spreads lead TIPS breakevens by 18 months on average; rising swap spreads today should keep TIPS breakevens 18 months from now under pressure.
| TIPS' Breakeven Leveled With Swap Spreads |
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| Click here for larger image. |
| Source: Bloomberg |
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