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

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 2008.2/5", 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.