FNCE 4070Financial Marketsand Institutions.ppt

Summary of Yield Curves and Business Cycles Estimating Future Rates of Inflation Using the TIPS market to determine the “breakeven” inflation rate. Assumption: Conventional Treasury rate includes both real rate and inflation premium. TIPS rate is simply the real rate. Breakeven inflation rate = Yield to maturity on conventional Treasuries – Yield to maturity on TIPS. Important: Use similar maturities. Difference is the market’s annual inflation expectation over the maturity period. U.S. Treasury Yield Curve Site for Observing Breakeven Rate of Inflation Link to the U.S. Treasury site below