You may have seen charts of the "break-even inflation" rate (% yield versus maturity) and wondered - what is this inflation rate represent?
Why does it vary with maturity, and maturity of what kind of product? What does it mean to say the B/E inflation rate in the US for April 2014 is 2%?
The Vanguard Group (an asset management firm) have published a tutorial on break-even inflation, and how it's derived, and how it's relevant to investment selection. It explains that B/E Inflation = Comparable Fixed Rate - Inflation-Linked Real Yield.
If BEI = 2%, then if average inflation is more than 2%, the inflation-linked investment will outperform the fixed rate investment.
Why does it vary with maturity, and maturity of what kind of product? What does it mean to say the B/E inflation rate in the US for April 2014 is 2%?
The Vanguard Group (an asset management firm) have published a tutorial on break-even inflation, and how it's derived, and how it's relevant to investment selection. It explains that B/E Inflation = Comparable Fixed Rate - Inflation-Linked Real Yield.
If BEI = 2%, then if average inflation is more than 2%, the inflation-linked investment will outperform the fixed rate investment.
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