Has anyone noticed that 10-year TIPS are yielding nearly 3% real? According to Bloomberg
, 10-year TIPS are yielding 2.96%, while 10-year Treasuries are yielding 3.87%, a break-even inflation rate of only 0.9%. Frankly, I don't understand why the implied inflation rate is so low.
The only thing I can think of is that a prolonged severe downturn will result in much lower inflation, with the high real rate implying a very high demand for credit by the US government. Usually, the real rate would fall during an economic downturn reflecting lower demand for money from the private sector. The surprising thing to me is that the market seems to be saying the government can borrow all this money without causing inflation down the road.