The Inverted TIPS Yield Curve

When the TIPS Yield Curve inverts, things tend to happen in a big way

The Inverted TIPS Yield Curve

We’re trying something a bit different this month with our Charts publication.

Jeff Snider mentioned, as we were working on the last Dollar piece together, that there are economic ‘warning signs’ all over the place, most noticeable in the historically inverted TIPS Yield Curve.

TIPS breakevens, or breakeven inflation rates, are the difference between the nominal and the inflation-adjusted bond yield of the same maturity. In other words, they help us gauge what the implied level of inflation expectation is across different maturities.

Instinctively, you would expect to see inflation (read higher prices) to have a greater impact as you move out the maturity curve; that is, the level of inflation should be higher in the long-term than in the short term. This makes sense in a world in which you would expect to see a certain level of prosperity growth, which pushes the general level of wealth higher, leading to higher prices (to all the PhD in economics out there, we can feel you’re breathing heavier… we’re only simplifying to help contextualize the chart).

The current reality is different though. The above-mentioned measures of inflation expectations inverted in December of last year. The 5-year breakeven is higher than the 10-year, and both of those are also becoming substantially higher than the 5-year/5-year forward inflation rate (which is derived from the breakevens at the 5s and 10s).

Given we hold Jeff in high regard, we wanted to get some thoughts on this chart from a handful of people who are way smarter than us to see if their opinion differed.

So below is what the inversion looks like, and a few points from our guests: Jeff Snider, Luke Gromen, Seth Levine, Tyler Neville, and Roger Hirst.

Jeff Snider | Alhambra Investments

Luke Gromen | Forest for the Trees

Seth Levine | The Integrating Investor

Tyler Neville | Blockworks

Roger Hirst | Lykeion & Real Vision

Published in: Charts
Tim Purcell

Co-founder & Head of Growth. Covers Energy, Markets, and Geopolitics. Ex-Goldman Sachs IMD, buy & sell side equity research, M&A, and head of strategy for media startup.

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