Definition of break-even rate

The break-even rate is applied to bonds and refers to the difference between the yield on a nominal fixed-rate bond and the real yield on an inflation-linked bond (such as a Treasury inflation-protected security, or Tips) of similar maturity and credit quality. If inflation averages more than the break-even rate, the inflation-linked investment will outperform the fixed-rate bond. If inflation averages below the break-even rate, the fixed-rate bond will outperform the inflation-linked bond.

 

break-even rate in the news

In April 2013, it was reported that US inflation expectations had hit a fresh low. Market expectations for US inflation over the next 10 years were reported to have dropped to 2.4 per cent from 2.6 per cent in March, based on the difference between the break-even rate between nominal and inflation-protected Treasury debt. 

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