5-year break-even point, dollar appreciation.
Figure 1: 5-year Treasury breakeven point (black, left scale), 5-year expected inflation (light blue, left scale), both in %; Nominal trade-weighted dollar index (dark red, right scale) and DXY (red), both logarithmically rebalanced to November 5, 2024 = 0. Source: Treasury Department and Federal Reserve, via FRED; Fed (KWW)Investing.com.
Because the 5-year breakeven point includes a risk premium, it is not a reliable indicator of inflation expectations. Following D’Amico, Kim, and Wei (2018), Kim, Walsh, and Wei (2018) provide estimates of expected inflation that remove risk and liquidity premiums. Inflation expectations have risen by about 5 bps since the election (through December 31, 2024), while breakeven rates have risen by about the same. This means that by today (January 8, 2025), inflation expectations have risen by about 15 bps. Perhaps it’s because the prospects for accelerated inflation due to fiscal debacle, tariffs and deportations have become more entrenched in the market.
The dollar’s continued rise (3.7% since the election) is significant as much more deficit spending is expected, higher real interest rates are expected (up 14bps in 5-year TIPS) and tariffs are suppressing expected growth in the rest of the world. . -world.
