Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / What the Bond Market Tells Us About Inflation's Next Move
Transcript
- Lucas: So the ten-year breakeven inflation rate just ticked up to 2.40 percent. That's up from 2.39 the day before. A single basis point barely registers as news, but the direction matters because breakevens are basically the bond market's forecast for inflation over the next decade. Luna: Breakevens — remind me how that works? Is it just the difference between nominal Treasuries and TIPS? Lucas: Exactly. You compare the yield on a regular ten-year Treasury to the yield on a ten-year Treasury Inflation-Protected Security. The gap is the annual inflation rate the market expects. Right now, about 2.4 percent. That's reassuringly close to the Fed's 2 percent target but still a little above it. Luna: And the fact that it's creeping up — even by a basis point — suggests the market isn't fully convinced inflation is dead yet. Lucas: Right. Meanwhile, headline CPI for April came in at 332.4, up from 330.29 in March. That's roughly 2.3 percent year-over-year, depending how you annualize it. Core CPI — which strips out food and energy — was 335.4, up from 334.17. So the actual inflation numbers are running around 2.3, 2.4 percent. The breakeven is basically saying 'we see this persisting.' Luna: So the bond market is kind of validating the CPI data. That's not always the case. Lucas: No, it's not. There have been stretches where breakevens were way above or below reported CPI. But right now they're in rough alignment. The bigger story, to me, is what's happening with nominal Treasury yields themselves. The ten-year yield has been surging — we saw that headline about 'risk-free' Treasury yields sending bond investors hunting for better opportunities. That's important because higher yields on safe assets pull money away from stocks, from real estate, from everything risky. Luna: And higher yields also mean higher borrowing costs for everyone — mortgages, car loans, credit cards. So it's not just a bond market story. Lucas: Exactly. The Fed funds rate has been stuck at 3.64 percent since April — flat. The daily rate as of May 21 is 3.62, essentially unchanged. So the Fed is on hold. But the bond market is doing the tightening for them by pushing long-term yields up. That's what economists call 'financial conditions tightening' without the Fed lifting a finger. Luna: I want to push back on something, though. The breakeven rate — is that really a good forecast? I've seen studies showing that inflation expectations from surveys of consumers or professional forecasters are sometimes more accurate. Lucas: That's a fair point. Breakevens aren't pure expectations — they embed a risk premium. TIPS investors demand compensation for the risk that inflation might be higher than expected, so breakevens can overshoot. But surveys have their own problems: consumers tend to overestimate short-term inflation because they focus on gas and groceries, and professionals herd. I think the best approach is to triangulate. Breakevens are telling us the market is pricing in a slow grind back toward 2 percent, not a collapse or a spike. Luna: For someone listening who wants to protect purchasing power — should they look at TIPS? Or are there better options given the current yield environment? Lucas: TIPS are the most direct hedge. But with real yields now positive — meaning the yield after inflation is above zero — they actually offer a decent real return. That wasn't true a few years ago when real yields were negative. You could also look at Series I savings bonds, though there's a purchase limit. For a more aggressive approach, commodities or inflation-sensitive equities like energy and materials have historically passed through inflation. But those come with more volatility. Luna: Speaking of volatility — gold had a rough week, down 0.7 percent. GLD the ETF fell 1.1 percent. And gold miners GDX dropped 2.4 percent. That's interesting given inflation is still above target. Lucas: Gold is tricky. It's often called an inflation hedge, but it's really a hedge against real interest rates and currency debasement. With real yields rising, gold becomes less attractive because it pays no yield. So a 2.4 percent breakeven and rising nominal yields are actually headwinds for gold right now. That's consistent with what we're seeing. Luna: So the bond market is sending a pretty coherent message: inflation is sticky, but not accelerating. The Fed stays on hold. Real yields are positive. Gold struggles. What does that mean for the average listener's portfolio? Lucas: I think the key takeaway is that the era of free money is over, but we're not in a crisis. If you're holding cash, you're still losing purchasing power at 2.4 percent a year. That's better than the 8 percent we saw in 2022, but it's not zero. So you need some exposure to assets that can grow with inflation — TIPS, I bonds, maybe a diversified equity portfolio. The bond market is telling us that inflation isn't going away quietly, but it's not running wild either. Luna: And it's worth noting that the breakeven rate can change quickly. If we get a surprise in next month's CPI or PCE — the PCE price index was at 130.3 in March, up from 129.48, so about 2.5 percent annualized — that could shift expectations. Lucas: Absolutely. The core PCE, which is the Fed's preferred gauge, was 129.3 versus 128.9 in February. That's running a bit hot too. So the Fed has all the cover it needs to stay put. I don't expect a rate cut anytime soon unless something breaks in the economy. Luna: You know, talking about all this — how the bond market, inflation, and your personal finances are all connected — reminds me that this show exists because listeners like you support it. We keep it ad-free so we can dig into topics like breakevens without interruption. If you find these conversations valuable, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep the episodes coming. Lucas: Yeah, it really does help. We're a small independent show, and listener contributions let us spend the time on research and avoid chasing clicks. Okay — back to breakevens. One thing I want to highlight is that the ten-year breakeven has been in a tight range between 2.3 and 2.5 percent for most of 2026. That stability itself is a signal. It means the market isn't panicking about inflation, but it's also not pricing in a rapid return to 2 percent. Luna: So what would break that range? What would push breakevens above 2.5 or below 2.3? Lucas: Above 2.5 would probably require a supply shock — a spike in oil prices, a trade war escalation that boosts import costs, or a big fiscal expansion. Below 2.3 would need a recession that crushes demand, or a credible Fed commitment to even tighter policy. Right now, none of those seem imminent. The APEC headlines this week showed the U.S. and China are still far apart on trade, but that's not new. So we're in a waiting game. Luna: Which brings us back to the core message for listeners: stay diversified, keep an eye on real yields, and don't assume inflation is solved. The bond market is a useful reality check. Lucas: Well said. And if you want a simple way to track this yourself, just look up the ten-year breakeven rate online. It updates daily. See if it moves with the headlines. That's the kind of financial literacy that actually helps you make decisions.