Chart of the week | Oil and breakevens

Chart of the week | Oil and breakevens

Whilst last year’s favourite word amongst investors was “unprecedented”, this year “reflation” appears to be the word on everyone’s lips. For central bankers and investors, breakeven rates are an important measure of inflation expectations. Simply put, the breakeven rate is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.

Breakeven rates are far from perfect. They can be affected by liquidity, inflation risk premia, and the technical features of buying an inflation-linked asset. Given this, breakevens are actually a measure of inflation compensation, comprised of expectation and other factors.

Of late, investors have been pointing to rising breakeven rates as a sign that a reflationary macroeconomic environment is here, fuelled by the roll-out of vaccines and resumption of global trade. Central bankers are happy, as rising inflation expectations suggest an environment where workers may feel confident enough to push for higher wages, thereby avoiding a deflationary environment (a central bankers greatest fear) for now.

It is important to note that whilst breakevens are rising, it appears that they are moving to the beat of a higher oil price. The high correlation between breakeven rates and oil prices is not a new phenomenon, but it has puzzled market participants and academics alike. Whilst it makes sense that there is a high correlation between oil prices and in the short-term, why would changes in oil prices affect inflation in five, ten, or twenty years from now? Some have suggested that whatever is moving the oil price could be having an impact on all other prices and wages, such as stronger economic growth. For me, that’s a pretty weak rationale, especially as breakevens are rising across multiple markets. One thing that does appear to make sense though is given the very high correlation between breakevens and oil, for breakevens to move higher, the oil price will have to march higher from its current level of  around USD60 a barrel.


This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on or can be obtained by contacting Fidelity Australia on 1800 119 270. The relevant Target Market Determination (TMD) is available via This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. Details of Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.


Want more insights like this?

Get our free, monthly e-newsletter bringing you valuable insights, opinion and education.