March 2021

Market performance in February was largely driven by a single factor…interest rates. Throughout the month, the yield on the 10-year treasury moved higher by more than 30 bps, ending February at 1.44%, its highest level in more than a year. Not only did this put pressure on fixed income returns (bond prices decline as interest rates increase), but equity markets also struggled, as higher duration growth stocks ended the month in negative territory.

In a recent post we identified that break even inflation rates are a reasonable predicter of actual future inflation. Given the nearly 50bps increase the 10yr treasury yield since the beginning of February, it begs the question if treasury markets have now fully priced in this new inflationary environment.

Break-even, or implied inflation, is the rate of expected inflation priced into treasury markets. With all of the talk regarding increasing inflation and break-even rates, it begs the question of how accurate break-evens are at predicting actual inflation over a bond’s horizon.