The Federal Reserve monitors hundreds, if not thousands, of economic indicators. But one that policymakers pay particular attention to is a measure of future inflation fears a�� something called the a�?Five-year Forward Breakeven Inflation Rate.a�?
I know thata��s quite a mouthful. So leta��s keep things simple. The Treasury Department issues two major kinds of debt a�� traditional Treasuries and Treasury Inflation Protected Securities (TIPS).
As the name suggests, TIPS offer investors a form of inflation compensation. Ita��s an extra enticement designed to draw investors in when they might otherwise stay away due to fears inflation will erode their returns.
You can get an idea about just how much inflation fear is percolating in the marketplace by comparing the yields available on regular Treasuries and the yields offered on TIPS. The higher the breakeven inflation rate, the more worried investors are a�� and vice versa.
With that in mind, take a look at this chart:
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You can see that this a�?inflation fear gaugea�? is falling off the table. In fact, it recently sank to only 1.59% — the lowest level going back to at least 1999! That tells me a few things:
First, that all the QE from the U.S. central bank and its counterparts overseas is utterly failing to bolster inflation a�� its main, stated goal.
Second, that investors believe the widespread commodity deflation in everything from oil to copper to grains to beans isna��t going away.
And third, while the U.S. economy has held up relatively well in the face of multiple global threats, that may be coming to an end. That means the Fed may have erred in waiting so long to hike short-term interest rates.
Long story short, the bond market isna��t sending out any inflation warning signs. If anything, ita��s telling us deflation is the bigger worry right now.
So how can you profit? Which interest rate investments make sense in this environment, and which ones dona��t? Are there other indicators like this Fed one Ia��ve highlighted today that you should watch to maximize your profits in the fixed income market?
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Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.