AFMC - Value In Breakeven Inflation
2023-06-20 23:30:00 ET
Summary
- Breakeven Inflation represents the market’s expectation of the average annual inflation rate over a specific period.
- Market participants and policy makers closely monitor breakeven inflation rates as they provide insights regarding future inflation trends.
- igher breakeven rates suggest that market participants anticipate higher inflation in future, while lower breakeven rates indicate lower inflation expectations.
By Apoorv Tandon, CFA
Cheap valuations and strong fundamentals present a favorable opportunity.
Breakeven Inflation, also referred to as inflation expectations or the breakeven inflation rate, represents the market’s expectation of the average annual inflation rate over a specific period.
Market participants and policy makers closely monitor breakeven inflation rates as they provide insights regarding future inflation trends. Higher breakeven rates suggest that market participants anticipate higher inflation in future, while lower breakeven rates indicate lower inflation expectations.
Several factors such as the economic outlook, central bank policy, supply and demand dynamics, liquidity and risk appetite typically affect the pricing of the breakeven inflation rate.
From a valuation perspective, the front end of the breakeven inflation curve continues to imply substantial easing in inflation in comparison to forecasts (both ours and policymakers’). Inflation breakevens also remain cheap relative to commodities and risk assets.
However, a few factors suggest a dislocation in the pricing of inflation expectations.
First , the U.S. economy has shown resilience despite aggressive tightening by the Federal Reserve. Though there are signs of softening in manufacturing data, the labor market has held up well and overall economic data do not appear to be showing imminent weakness.
Front-end breakevens following the banking crisis are implying very cheap valuations as the one-year cash breakeven implies headline CPI that is 1.90% below consensus through June 2024.
Second , we believe monetary policy tightening is at its peak, which should remove headwinds for breakeven inflation. Fed Chair Jerome Powell has reiterated that risks are more balanced while laying out arguments to assess the impact of 500 basis points in cumulative tightening over the last 15 months. The current central bank pause offers a supportive backdrop for breakeven inflation.
Third , breakeven inflation fair value analysis based on factors such as commodity prices, credit spreads and other risk assets points to attractive valuations.
Fourth , Treasury Inflation Protection Securities trading volume has declined to pre-pandemic levels, which should provide demand upside if underlying inflation remains sticky.
Overall, we think breakeven inflation at current levels provides opportunity for cheap inflation hedges and alpha sources in multi-asset portfolios.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2023 Neuberger Berman Group LLC. All rights reserved.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Value In Breakeven Inflation