Can someone explain me the difference between zero coupon inflation swap rate and breakeven rate? For example, currently, US 10y zero coupon inflation swap rate is about 1.4%, while US breakeven 10y rate is about 1.3%. Is liquidity the main driver for the difference?



1 Answer 1


Yes, you could call this a liquidity effect. The 10yr breakeven rate is defined as the difference between the nominal yield of the 10yr Treasury and the real yield of the 10yr TIPS. The TIPS has less liquidity than the Treasury, so trades at a discount (in the sense of asset swap levels).

There are a few other effects to do with the shape of the yield curve, zero coupon rates versus par rates and the suchlike, but the main effect is as described. It has been persistent over time.


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