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1/3 In the thread linked below, I argue that the bond market is worried about inflation. I can hear the response that inflation swaps and/or TIPS Inflation Breakevens are not reflecting this. Maybe they are! 🧵 2/3 The 5-year TIPS inflation breakeven rate is the market’s pricing of the average annual inflation rate over the next 5 years. It has averaged 73 basis points higher post-COVID (blue) than pre-GFC (red). Also note that the standard deviation range (shaded) post-COVID is completely above the standard deviation range pre-COVID. Inflation expectations have stepped higher. Inflation expectations are saying the post-COVID environment is a different regime from the previous one. They are not the same (see the thread linked above). 3/3 The 5-year/5-year forward TIPS inflation breakeven rate is the 5-year average annual inflation rate over the next five years (the residual from the 10-year and 5-year TIPS inflation breakeven rates). So, it is what the market is expecting the inflation rate to average between 2031 and 2036. The expectation is that the inflation rate over the next decade will settle back toward the post-GFC rate. ---- But for the next five years, inflation is expected to remain elevated. It is not expected to rage out of control, but to be higher than the Fed’s 2% target, probably somewhere between 3% and 4%. Typical inflation cycles last around 10 years (8 to 12 years), so this is perfectly consistent with history: we have another 5 years or so of elevated inflation before this cycle ends.