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Higher breakevens

Inflation expectations are ramping up again. After a continuous slowdown in the rate of inflation since June 2022, almost uninterrupted, investors are starting to price a second wave of higher prices, which has a direct impact on the Fed decision on rates. Furthermore, there are some respected voices in the market that are starting to talk about no rate cuts in 2024. As you can see below, the 2 year breakevens, the 2 year expected inflation in 2 years, obtained by comparing rates between 2 year TIPS and 2 year Notes, has gone up form 2%, the Fed’s goal, to 2.8%, and it’s still ramping up. In three weeks, on March 20th, the Fed will likely announce no change in offices rates, and that’s mostly discounted, but they will provide guidance about future actions regarding rates, and with low unemployment and inflation running higher, chances of ratecuts are vanishing.

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