Inflation Expectations Keeping Tumbling

Inflation expectations keep tumbling.

On Tuesday, five-year breakevens made new lows for the year, falling to 1.54% according to data from Bloomberg.

Breakevens are calculated by subtracting the yield on Treasury Inflation-Protected Securities notes from Treasury bonds of the same duration. The difference is what the market thinks inflation levels will be that far out.

So basically, the market thinks that in five years, inflation will be running below 1.6%.

The Fed's stated inflation target is 2%.

Early last week, we highlighted commentary from Bank of America Merrill Lynch analyst Priya Misra, who noted that breakevens were currently near levels that the Fed has begun quantitative easing programs, not ended them. The Fed has said that it plans to end its current QE program at the end of this month.

Now, breakevens are even lower.

Many in the market have seen the end of the Fed's current QE program as beginning the countdown to the Fed's first rate hike.

But with inflation remaining tepid and wage growth disappointing, the market isn't expecting the Fed's first rate hike to come until September of next year, according to data from CME Group.

The Fed's recent monetary policy statements have said it expects there will be "considerable time" between the end of QE and the beginning of rate hikes. Earlier this year, some expected "considerable time" would be closer to 6 months: now it's almost 12.

As we wrote last week, breakevens don't make it seem like the Fed can - or will want to - raise rates anytime soon.

And now even less so.