You Have Not Missed It

Recently, 10-year inflation breakevens reached 2.78% – matching the all-time highs (since TIPS were issued in 1997) from 2005. If you think about breakevens in the same way you think about TSLA, then it may seem to you that this is a very bad time to buy inflation. No one who bought 10-year inflation at 2.78% or in that neighborhood has ever had a mark-to-market gain.[1] Heck, for a couple of decades it has been a fairly automatic trade to dump 10-year breakevens once they got a bit over 2.50%. Moreover, with y/y inflation at 6.2% – even if it goes a little higher still before it ebbs – it certainly seems like the worst is behind us, right?

Board, Blackboard, Economy, Inflation, Money

Image Source: Pixabay

I hear from a lot of investors who are afraid that they “missed the trade.” The first spike happened so quickly that not many people outside of the inflation geeks had time to get on board. And we’re only just now figuring out (well, it’s only just now becoming common knowledge) that the “transitory” effects have lasted and are lasting a lot longer than we were told to expect. These tactical traders feel like they missed a once-in-a-generation, if not a once-in-a-lifetime, trade in inflation, which is now over.

Relax. You have not missed it.

Okay, perhaps you should have bought inflation when 10-year breakevens were at 0.94%. At that level, the market was making a huge bet that inflation was forever dead. There was almost no risk in buying inflation at that level, as I pointed out at the time. That was the right trade, and the easy trade, and I know you’re committed to buying those levels the next time you see them. Unfortunately, you won’t. Those levels won’t be seen again for decades, if ever. The only way they could happen is because there was no natural bid for inflation risk, no one who was worried about it. No matter what happens to inflation from here, lots of people have learned that it’s something you ought to be worried about, especially if you can hedge it essentially for free as you could 19 months ago.

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