TIPS and oil headed in opposite directions
Analysts at Credit Suisse note the breakdown in the correlation between breakevens and oil.
TIPS are inflation-protected bonds that reset based on the CPI, subtracting the 10-year yield from 10-year TIPS gives a market-based prediction of inflation.
The latest fall in crude puts downward pressure on inflation yet TIPS/10s breakevens are 15 bps above where they were last time oil was down here.
There is a similar phenomenon in Eurozone breakevens so that makes it less likely (but still possible) that it's some kind of skew.
Overall, Credit Suisse continues to see a low inflation environment despite a better jobs market. They suggest flatteners in the bond market but USD shorts will eventually be the trade as well.
"A labor-market-driven push on inflation may not be sizable enough to move the needle in the face of declining oil prices, deflationary core goods (in our opinion reflective of excess capacity in China), and slowing medical inflation (likely related to the ACA)," they write. "Overall, labor market improvement should support prices in the US, but we see minimal risks of sharply accelerating inflation in the next few months."
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