The TIPS breakeven curve is the most inverted since the Federal Reserve started tracking the TIPS real yield two years ago. The spread of breakevens, or the difference between nominal and TIPS real yields, has fallen to negative 20 basis points between five- and 10-year TIPS, down from around positive 40bps when the Fed started tracking it in January of 2003. High oil prices and market expectations prices will go higher have driven the breakeven curve to this extreme, explained Alex Li, interest-rate strategist at Credit Suisse First Boston. Although oil prices fell from recent highs to $51.75 per barrel on April 12, the six-month futures contract expects prices to rise again to $55.90 per barrel. In addition, the Fed's commitment to keeping long-term inflation contained is keeping breakevens low in the back end of the curve, Li said.
Li said the curve inversion is here to stay as long as oil prices stay high at more than $50 a barrel. He said investors can benefit from the curve inversion by buying TIPS in the short end and selling TIPS in the long end in favor of nominal Treasuries.
