US inflation expectations rise from decade lows on Fed's unlimited QE

Inflation expectations, gold rise after the Fed's open-ended QE announcement.
The 10-year breakeven inflation rate recovers from the lowest level since 2009.

Market-based measures of inflation expectations in the US rose on Monday after the Federal Reserve announced open-ended asset purchases and set up several new lending programs.

The 10-year breakeven rate, which measures the difference or gap between 10 year Treasury Bond and Treasury Inflation-Protected Securities (TIPS) and serves as an indicator of inflation expectations over the 10-year horizon, rose to 0.80% from 0.50%, which was the lowest reading since 2009.

"The FED goes for unlimited QE, purchasing all types of securities: Treasury bonds; corporate bonds in the primary market for Large Employers and in the secondary market for all well-rated firms; ETFs of Treasuries; Municipal bonds and commercial paper, asset-backed securities (ABS) of both residential and commercial property; ABS of student loans, auto loans, and credit cards; commercial paper. The FED also announced that it's preparing a facility to support SMEs' loans. The overall range of assets larger than in 2008", former ECB Vice President Vitor Constancio tweeted.

While these measures have been initiated to keep credit markets from freezing, the market expects them to boost long-term inflation, as evidenced by the rise in the breakeven rate.

"If you think gold is having a good rally today, look at the 2047 TIPS. The market now thinks long term inflation will return with vengeance. It was a very different picture last week," Charlie Morris, multi-asset fund manager at Atlantic House, tweeted on Monday.

Immediately after the Fed's 12:00 UTC announcement, gold, a classic safe-haven asset, rose from $1,494 to $1,524 in an hour. At press time, the yellow metal is trading near $1,570 per Oz, representing a 1% gain on the day.

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