Breakeven rates are used to estimate market expectations of inflation.
A breakeven rate is simply the difference in yield between inflation-protected bonds (i.e., U.S. Treasury TIPS) and regular government bonds of the same maturity.
For example:
If regular government bonds yield 5% and TIPS yield 3% for the same maturity, the breakeven rate is 2%.
In other words, the market is implying that the annual rate of CPI inflation will be 2%.
If the breakeven rate is negative, the market is expecting deflation in the near future.
Ministry of Finance Announcement
On November 3, 2022, the Ministry of Finance announced they were ending the issuance of Real Return Bonds (RRBs) in Canada. RRBs were the Canadian equivalent of U.S. TIPs. The move left Canadian rate analysts with no reliable, liquid and readily available market-based measures to estimate inflation—or hedge inflation risk, for that matter.
As a result, we typically look to U.S. breakeven rates for a rough sense of how market events affect potential future inflation.