How to chart inflation breakevens
Quick answer
Inflation breakevens are the yield spread between nominal Treasuries and TIPS, representing the market's inflation expectations. The three key measures: 5-year breakeven (near-term), 10-year breakeven (medium-term), and 5Y5Y forward breakeven (the Fed's preferred long-run measure). Chart them using FRED series T5YIE, T10YIE, and T5YIFR.
What breakevens tell you
Inflation breakevens — the yield spread between nominal Treasury bonds and Treasury Inflation-Protected Securities (TIPS) — show the market's inflation expectations. They're called 'breakevens' because they represent the inflation rate at which an investor would be indifferent between holding a nominal bond and a TIPS bond.
A 10-year breakeven of 2.5% means the market expects average annual CPI inflation of 2.5% over the next decade. If actual inflation exceeds 2.5%, the TIPS holder wins. If it's below 2.5%, the nominal bond holder wins.
The three breakevens that matter
5-year breakeven (T5YIE): Near-term inflation expectations. Sensitive to energy prices, supply chain disruptions, and current economic conditions. The most volatile of the three.
10-year breakeven (T10YIE): Medium-term expectations. The standard measure referenced in most macro analysis. Less volatile than the 5Y because it averages over a longer horizon.
5Y5Y forward breakeven (T5YIFR): This is the Fed's preferred measure. It shows expected inflation from 5 years from now to 10 years from now — stripping out near-term noise to reveal long-run inflation expectations. When this moves, the Fed pays attention.
Why the 5Y5Y forward matters most
The 5Y5Y forward breakeven is calculated as: (10Y breakeven × 10 - 5Y breakeven × 5) / 5. It isolates the market's view on inflation in the second half of the decade, removing the noise from current energy prices and supply disruptions.
When the 5Y5Y forward stays anchored near 2% (the Fed's target), it signals that long-run inflation expectations are 'well-anchored' — a phrase the Fed uses constantly. When it drifts above 2.5% or below 1.5%, it suggests the market is losing confidence in the Fed's ability to control inflation.
Building the chart
All three series are available for free from FRED: T5YIE, T10YIE, T5YIFR. Connect FRED as a data provider in Quadesto and chart all three on a single time series. The chart reveals the relationship between near-term and long-term inflation expectations.
Add the Fed's 2% target as a horizontal reference line to see how expectations compare to the goal.