Don't look now - inflation expectations are getting interesting again.
Last year, inflation expectations as measured by the difference between inflation adjusted securities – TIPS – and nominal treasuries floated around 2-2.15% for 5-30 years. As of today, those time-frames predict 1.61% annually over the next 5 years and only up to 1.81% over the next 30.
(Somewhat) Closely Monitoring Inflation Expectations
Previously, we used to check in on inflation expectations once a month here on DQYDJ.
Frankly... it got a bit boring.
The Federal Reserve and/or other actors in the economy convinced investors that the economy was on track for targeted 2% inflation. You can only write about well behaved indicators for so long.
For essentially all of 2018 – and really dating back to mid-2016 – inflation expectations on the 5-year breakeven were closer to the 2% target than they are today.
Outside of a few dips in 2017 and the swoon in October-November, we're now challenging the lowest expectations we've seen under President Trump.
| DATE | 5 YR Expectations | 10 YR Expectations | 20 YR Expectations | 30 YR Expectations |
| 6/3/19 | 1.56% | 1.73% | 1.80% | 1.81% |
| 6/4/19 | 1.59% | 1.74% | 1.83% | 1.83% |
| 6/5/19 | 1.59% | 1.75% | 1.84% | 1.85% |
| 6/6/19 | 1.58% | 1.73% | 1.82% | 1.82% |
| 6/7/19 | 1.61% | 1.74% | 1.80% | 1.81% |
To read these: X% a year over the next Y years.
Since 5 year TIPS are the most volatile in the series, here's a chart looking at their performance over the last 20 years:
So, everything has fallen – real and nominal.
Inverted Yield Curve and Dipping Inflation Expectations
We've talked a bit about the inverted yield curve here on the site. As it turns out, the 2 year 10 year still isn't inverted, while the more important 3 month 10 year remains awkwardly inverted.
(If you're looking to refinance 3 year to 10 year ARMs are tempting. Also, Bay Area house prices have stalled which is... a thing.)
Throw the behavior of Treasury break-evens (they aren't the best measure of inflation, but good for a quick measurement) on top? Count your humble host as wary about the economy's prospects for the rest of 2019.
Convince me otherwise in the comments - how do you see the rest of 2019 playing out?
