Here is a refresher of how to interpret signals from the TIPS market (thread).
@LizMcCormickWV @ctorresreporter @jbensondurham
bloomberg.com/news/articles/…
TIPS Rate =
Expected Average Real Fed Funds Rate +
Real Term Premium +
Liquidity Premium
The liquidity premium reflects normally lower liquidity in the TIPS vs nominal market (investors demand a premium to hold TIPS).
Breakeven Rate =
Expected Inflation +
Inflation Risk Premium -
Liquidity Premium
So, the liquidity *adds to* observed TIPS rates and *subtracts from* breakeven rates (that's b/c breakeven=nominal rate - TIPS rate).
Note that these methods are created and maintained at the #Fed itself, so the #Fed is aware of what’s really going on.
No surprise there: That's what should happen when all movements are induced by TIPS liquidity. Simple arithmetic shows what's going on.
Nominal Rate = TIPS Rate + Breakeven.
Or, according to 2 and 3 above:
Nominal Rate =
Expected Avg. Real Fed Funds Rate +
Expected Inflation +
Real Term Premium +
Inflation Risk Premium
The liquidity premium cancels out and nominal yields move little.
* Breakevens/TIPS rates are moving mostly because of liquidity, not inflation expectations.
* The macro signals (lower inflation AND growth expectations) happened quickly in the spring and are not being reversed.
* No surprise that nominal rates stay low.