Breakeven Inflation Rate
The inflation rate at which a nominal Treasury and a same-maturity TIPS deliver equal returns — the market's priced-in inflation expectation.
Formula
Breakeven Inflation = Nominal Treasury Yield − TIPS Real Yield (same maturity)
The breakeven inflation rate is the difference between the yield on a nominal Treasury and the real yield on a TIPS of the same maturity. It represents the average annual inflation rate over that horizon at which holding either bond would produce the same return — hence the term "breakeven."
It is the market's real-time forecast of inflation. If the 10-year nominal yields 4.3% and the 10-year TIPS real yield is 2.0%, the 10-year breakeven is 2.3% — investors are pricing roughly 2.3% average inflation over the decade. When breakevens rise, the market is repricing inflation expectations higher; when they fall, disinflation is being priced.
The practical caveat: breakevens also embed an inflation risk premium (which pushes them up) and a TIPS liquidity premium (which pushes them down), so the net gap versus "pure" expected inflation is ambiguous. Still, breakevens and the related 5-year, 5-year forward measure are watched by the Fed itself as a gauge of whether inflation expectations stay anchored near its 2% inflation target.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerFederal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateNominal Yield
A bond's stated yield without adjusting for inflation — the face-value return before accounting for the erosion of purchasing power.
IntermediateTIPS
U.S. Treasury bonds whose principal adjusts with CPI, so the investor is repaid in inflation-protected dollars and earns a real yield.
Intermediate