German 10 Year Breakeven Inflation

Methodology: Estimating the German 10-Year Breakeven Inflation Rate

This analysis presents a derived time series for the German 10-year breakeven inflation rate, calculated by approximating the market’s implied inflation expectations using publicly available bond pricing and macroeconomic data.

Objective

The goal is to estimate the breakeven inflation rate by taking the difference between:

• The nominal yield of standard German government bonds (Bunds)

• The real yield of German inflation-linked bonds (similar to TIPS)

This difference represents the inflation expectations priced into the bond market over a 10-year horizon.

Data Inputs

The following datasets and sources were used:

• German Government Bonds: Pricing and metadata for both nominal and inflation-linked bonds. All bonds data and prices came from the Deutsche Finanzagentur.

Methodology Overview

1. Bond Data Preparation

German bond instruments were filtered for positive prices and coupons. Only the latest version of each bond per date was retained to ensure data freshness and consistency.

2. Yield-to-Maturity (YTM) Calculation

An approximate formula was applied to compute YTM for both nominal and inflation-linked bonds, based on their coupon, price, and time to maturity.

3. Interpolation to 10-Year Maturity

Because bonds rarely mature exactly at 10 years, linear interpolation was applied between the nearest shorter and longer maturities to construct a constant-maturity 10-year yield curve. This was done separately for nominal and real bonds.

4. Breakeven Inflation Estimation

The breakeven rate was calculated by subtracting the interpolated real yield from the interpolated nominal yield for each date. This yields the market’s expectation of average inflation over the next 10 years.