- Inflation expectations have slowly edged up in recent weeks, after reaching a low in June 2017. As the chart highlights, for example, the 5-year Breakeven Inflation Rate, which represents expected inflation over the 5-year period, has risen approximately 5 bps year to date and has nearly reached the 2% mark.19 Longer-term inflation expectations have remained just above 2% since the start of 2018.19
- Price expectations moved higher primarily on account of firming oil prices, which reached a three-year high this week, but also with continued solid economic data across the developed world and optimism surrounding the recently signed U.S. tax plan.24
- The yield on the 10-year Treasury note has risen for many of the same reasons as inflation expectations. This week, it neared the upper end of the 2.2%–2.6% band inside which it has traded since early 2017.25
- Even taking recent upward trends into account, however, each measure remains well in check when looking at them over a longer time period.
- Inflation expectations moved briefly above 2% in early 2017, but dipped back down through the remainder of the year and remain well below their post-crisis average.19 Likewise, the 10-year Treasury note remains within its recent cyclical trading range.25 Even after the Fed’s five rate hikes this cycle, however, the measure is comfortably under its post-crisis high.
1 Federal Reserve Bank of St. Louis, DJIA, http://bit.ly/2jZjDYt.
2 Federal Reserve Bank of St. Louis, WTI, http://bit.ly/292Tgue.
3 U.S. Census Bureau, http://bit.ly/Y4FaTF.
4 Federal Reserve Bank of St. Louis, S&P 500, http://bit.ly/2d3pN5b.
5 ICE BofAML U.S. High Yield Master II Index.
6 Thomson Reuters Lipper.
7 ICE BofAML U.S. High Yield Master II Index (yield-to-worst).
8 Credit Suisse Leveraged Loan Index.
9 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
10 U.S. Energy Information Administration, http://bit.ly/2e0fwZV.
11 ICE BofAML U.S. High Yield Energy Index.
12 Credit Suisse Leveraged Loan Index (energy component).
13 ICE BofAML U.S. High Yield Energy Index (yield-to-worst).
14 Credit Suisse Leveraged Loan Index (energy component, yield-to-a-three-year maturity).
15 Econoday, http://bit.ly/1iJOdAP.
16 Federal Reserve Bank of St. Louis, 10-year yield, http://bit.ly/29ecBfp.
17 The Wall Street Journal, http://on.wsj.com/2DnUoZB.
18 The Wall Street Journal, http://on.wsj.com/2AUIkw3.
19 Bloomberg, based on the 5-year and 10-year breakeven inflation rates.
20 Federal Reserve Bank of St. Louis, 2-year yield, http://bit.ly/2anGvQ0.
21 Bureau of Labor Statistics, http://bit.ly/2jKLr2f.
22 Bloomberg, based on CME data.
23 Federal Reserve Bank of St. Louis, 10-year minus 2-year, http://bit.ly/2oMWaP2.
24 Federal Reserve Bank of St. Louis, WTI oil prices, http://bit.ly/292Tgue.
25 Federal Reserve Bank of St. Louis, 10-year Treasury note, http://bit.ly/29ecBfp.
The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.