The descent into hell of breakeven inflation rates

Edito The breakeven for the 10-year Bund€i has fallen to its lowest level since March 2016. Same story in the United States, where the breakeven for the 10-year TIPS is at its lowest this year at 1.71%. There is one exception: breakevens for British linkers, despite the easing of nominal rates, have risen. In the case of th e 10-year indexed-linked Gilt, it reached 3.47% at the start of June. The reason is that concerns over a no-deal Brexit have fuelled inflation expectations. Despite the political situation in Ital y the 10-year Bund€i-BTP€i B/E box, aft e r reaching a year’s high at 38bp on 24 May, succeed ed in narrowing at the end of the month, and currently sits at 28bp. There is little cause to be very optimistic for coming months, that is of course unless there is an unexpected shock, for example a surge in crude oil prices. At this juncture, however, we do not anticipate a pronounced rise in crude oil prices in the next few months. I f the United Kingdom exits the European Union without a deal, breakevens for British linkers will be buoyed by both sterling’s depreciation and the application of customs tariffs on goods imported from the European Union and most third-party countries having signed a trade agreement with the European Union.