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Peng: Fed Tapering to What?

The following chart demonstrates the bind the Fed is in. It shows the five year Treasury yield after Constant Maturity adjustment, the five year TIPS ( iShares TIPS Bond ETF (TIP)) yield (real yield excluding inflation effect), and the difference between the two (five year breakeven, or inflation expectation implied by the market) since the beginning of 2009 (Source: Federal Reserve.)


For all its shock and awe, QE3 has had little effect on its most prominent targets, the inflation expectation and the Treasury yield. The 5Y CMT yield has been stuck around 0.75% since Twist2, while the 5Y TIPS yield has bottomed out at -1.5% since QE3. And inflation expectation has been in the range of 2.0% to 2.3%, and heading down since February, shortly after the latest round of "green shoots" talks started. The most one could say is that QE3 perhaps provided support on inflation expectation at 2%.

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