Glossary / Markets

Breakeven inflation

Breakeven inflation is the difference between a nominal government bond yield and the real yield on an inflation protected bond of the same maturity, and it is read as the inflation rate the market expects over that period.

If the ten year nominal is 4.70 percent and the ten year real is 2.38 percent, the ten year breakeven is 2.32 percent. At that rate of inflation, both bonds return the same.

It is the cleanest market read on inflation expectations available, and it updates every day.

Where people get it wrong

Treating it as a forecast rather than a price. It contains a risk premium as well as an expectation, and the two cannot be separated by looking at it.

Related terms

Real yield Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning. Yield curve The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk.

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