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Thursday, November 8, 2018

Breakeven Inflation Analysis

The retail rollout of Breakeven Inflation Analysis has started. The ebook version is now available at some Amazon regional stores, and will appear at other retailers within a few days.

Universal book link:

The publication of the paperback edition will take a few weeks.

Book Description

The great inflation of the 1970s in the developed countries provoked strong economic (and political) reactions. In finance, investors searched for ways to protect themselves from inflation. The United Kingdom launched the first modern inflation-linked bonds in 1981. In addition to being of interest to investors looking for protection against inflation, these bonds also provide a market-based measure of inflation expectations. Since investors have “skin in the game,” the resulting forecasts might be better than a purely survey-based inflation forecast. More reliable inflation forecasts should be useful for policymakers that aim to control inflation.

This report discusses the breakeven inflation rate that is implied by pricing in the fixed income markets. For those with a casual interest in the subject, it is probably good enough to view those inflation breakeven rates as a market-implied forecast for inflation. However, if one wants to delve into the analysis, it is necessary to come to grips with the complications in the subject. Is the forecast biased? Are there technical factors in the bond market that affect pricing? The objective of this report is to offer an intermediate-level introduction to these issues. The target audience is either those with an interest in finance and who are unfamiliar with inflation-linked bonds or economists who want to understand better the factors that affect inflation breakeven rates.

Book Information

The paperback edition is 130 pages, excluding end matter. (The page count could change slightly as a result of formatting changes before publication.) This includes an appendix, which was a reprinted section taken from the earlier book Interest Rate Cycles: An Introduction.

The writing style is more advanced than earlier BondEconomics titles, with the target audience being economists interested in understanding the mechanics of the inflation-linked bond market, or market participants who wish to have a greater understanding of the forces affecting inflation-linked pricing. Source code used for some numerical examples is found within the Python SimplePricers module:

ISBN Information

  • Paperback ISBN: 978-1-7751676-2-4
  • Kindle ISBN: 978-1-7751676-3-1

Table Of Contents

Chapter 1  Overview
1.1  Introduction
1.2  The Eras of Inflation and Flat-flation
1.3  About This Report
Chapter 2  Breakeven Fundamentals
2.1  Inflation-Linked Bonds and Breakeven Inflation
2.2  Inflation Index Basics
2.3  Seasonality and Inflation Forecasts
2.4  Daily Index Calculations
2.5  Inflation-Linked Bond Structure and Cash Flows
2.6  Inflation Swaps
2.7  Curve Fitting Concepts
2.8  U.K.-Style Linkers
2.9  Credit and Index Definition Risk
Chapter 3  Breakeven Market Analysis
3.1  Introduction
3.2  The Role of Energy Prices
3.3  Short-Term Inflation Forecasting
3.4  Breakevens Versus Forecasts
3.5  Can We Estimate the Inflation Risk Premium?
3.6  Hedge Ratios
3.7  Principal Put
3.8  Tax Treatment
Chapter 4  Macro Considerations
4.1  Introduction
4.2  Inflation Breakeven Matters, Not the Real Yield
4.3  Inflation Targets and Fair Value
4.4  Inflation Forwards and Valuation
4.5  Directionality
4.6  Lack of Issuers
4.7  Euro Area
4.8  Hedging Efficiency and Asset Allocation
4.9  Final Remarks
A.1  Inflation Breakeven Directionality (From “Interest Rate Cycles”)

Universal Book Link:


  1. Congratulations on finishing the book, Brian. Very much looking forward to reading it.

  2. I am a massive fan of using BE inflation to measure investment paradigms. Purchasing your book tonight, I hope it meets my expectations (pun on inflation expectations).


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