The 10-year expected inflation estimate that we report is the rate that inflation is expected to average over the next 10 years.
This chart shows the model’s estimates of the inflation risk premium, the real risk premium, and the real interest rate. The inflation risk premium is a measure of the premium investors require for the possibility that inflation may rise or fall more than they expect over the period in which they hold a bond. Similarly, the real risk premium is a measure of the compensation investors require for holding real (inflation-protected) bonds over some period, given the fact that future short-term rates might be different from what they expect. Both the real risk premium and the inflation risk premium can be interpreted as investors’ assessment of risk. In the case of the real risk premium, it is an assessment of the risk of unexpected changes in the real interest rate, and in the case of the inflation risk premium, it is an assessment of the risk of unexpected changes in inflation.
This chart compares the model’s estimate of 10-year real interest rates against TIPS yields. The comparison can be interpreted as illustrating the importance of factors not in the model (taxes, liquidity, the embedded option) for the TIPS market. As TIPS are not used in the model, it also serves as a simple out-of-sample test for the model.
This chart shows the model’s estimates for expected inflation at horizons of 1 to 30 years at three points in time: the current month, the previous month, and the previous year.