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Two Pictures from the Financial Markets

Summary:
Usually, the Friday after Thanksgiving holiday is a quiet trading day. Today, there was lots of news to react to. Figure 1: Five year inflation breakeven, calculated as 5 year Treasury yield minus 5 year TIPS (blue), and ten year – three month Treasury spread (red). Source: Treasury via FRED, author’s calculations. The inflation breakeven (5 year) has fallen (although this spread is not adjusted for risk and liquidity premia), while the yield curve has flattened, suggesting slowing growth. Consistent with downwardly revised growth prospects — for now — real rates have fallen, while implied uncertainty has risen. Figure 2: Five year TIPS yield (blue, left scale), and VIX (red, right scale). Source: Treasury, CBOE both via FRED.

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Usually, the Friday after Thanksgiving holiday is a quiet trading day. Today, there was lots of news to react to.

Two Pictures from the Financial Markets

Figure 1: Five year inflation breakeven, calculated as 5 year Treasury yield minus 5 year TIPS (blue), and ten year – three month Treasury spread (red). Source: Treasury via FRED, author’s calculations.

The inflation breakeven (5 year) has fallen (although this spread is not adjusted for risk and liquidity premia), while the yield curve has flattened, suggesting slowing growth.

Consistent with downwardly revised growth prospects — for now — real rates have fallen, while implied uncertainty has risen.

Two Pictures from the Financial Markets

Figure 2: Five year TIPS yield (blue, left scale), and VIX (red, right scale). Source: Treasury, CBOE both via FRED.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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