Yet another sign that some investors have started pricing reflation. We think FED is likely to reach its inflation target and this time around a bit more. Last week, 10 year treasury inflation protected securities returned 1.7%, best weekly return in years and that came in the back of FOMC policy announcement, for which rates were on hold but serious changes in projections.
Few weeks ahead of the meeting, FED’s vice chair Stanley Fischer said, initial stirrings of inflation visible.
Another measure, core inflation, which excludes volatile components, such as fuel and food already running higher than FED’s medium term target of 2%. In February, it rose by 2.3% y/y.
Breakeven rates, which compare yield in conventional bonds and inflation protected bonds are already running highest in months. 10 year break even rates now at critical point of 1.62%, a level not seen since December.
We expect further rise in inflation expectations towards 2% and buying of TIPS are highly recommended.


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