The Impact of News on the Term-Structure of Breakeven Inflation

Abstract

We present estimates of the impact of major macroeconomic announcements on two measures of U.S. forward breakeven inflation (the rate of realized forward inflation that leaves an investor equally well off whether he/she holds a nominal or indexed forward investment.) One set of measures is derived from discount curves fit to U.S. Treasury securities and the other set is calculated using inflation swaps. We find that forward breakevens across the maturity structure for both breakeven measures rise with surprises to core CPI, employment, and oil futures and that those responses are broadly similar across the breakeven measures. The reactions of inflation swap breakevens are less precisely estimated and are more variable than the reactions of treasury curve based breakevens. Stability tests find a break in the summer of 2008, which we interpret as separating the period before the worst market disruptions of the 2008 crisis from the crisis period itself.

Keywords: TIPS, inflation swaps, breakeven inflation

JEL Classification: G12,