Definition
Breakeven inflation is derived from the yield spread between nominal Treasuries and TIPS of equal maturity. It represents the market's consensus inflation expectation. If actual inflation exceeds the breakeven rate, TIPS outperform nominals; if inflation is lower, nominals win. Breakeven rates are closely watched as a real-time measure of inflation expectations.
functions Formula
Breakeven Inflation = Nominal Treasury Yield − TIPS Yield
lightbulb Example
10-year Treasury yields 4.3%, 10-year TIPS yields 1.8%. Breakeven = 2.5%. If inflation averages above 2.5% over 10 years, TIPS will have been the better investment.
verified_user Key Points
- Market-implied inflation expectation
- TIPS outperform if actual inflation exceeds breakeven
- Closely watched by the Fed and investors
- 5-year, 5-year forward breakeven gauges medium-term expectations