Bond Market Expects Inflation to Be Only 1.75%

The top chart shows the bond market-based 10-year TIPS-derived expected inflation back to 2003, calculated as the weekly difference between 10-year regular, nominal Treasury yields and 10-year Treasury inflation-indexed yields (a measure of the real interest rate), both on a constant maturity basis (St. Louis Fed data here for 10-year TIPS and here for regular 10-year Treasuries); the bottom chart shows those yields graphed separately.

After an unusual period in late 2008 resulting in a narrowing spread when the TIPS 10-year yields were unusually high and approaching 3%, and regular Treasury yields were unusually low and approaching 2%, the Treasury market seems to have stabilized, and the bond market's 10-year expectation of inflation is now around 1.75%, lower than the inflationary expectations from 2003-2007 of around 2.5%.

Many analysts and economists seem to be worried about future inflation, resulting from the easy Fed monetary policy in 2008 (which has also contributed to a falling dollar). Apparently the bond mark doesn't necessarily share those concerns. According to the inflationary expectations derived from the bond market, future inflation is less of concern now in 2009 than it was during the 2003-2007 period.

Comments

[Joseph L. S...:]

When given a choice of trusting government pronouncements, brokerage research or the actual actions of professionals and amateurs putting their money to work, the intelligent investor looks to see what the last group are actually doing. All the fudging by government economists and screeching from brokers and the financial press are just that. The bond market will, in the aggregate, predict short-term inflation and deflation, if only we will listen to what it is saying...

Oct 16 10:22 AM

[Dave Wrixon:]

The Bond Market simply reflects that Bernanke is buying all the bonds.

Oct 16 10:36 AM

[chap08:]

This is the "actions of professionals and amateurs putting their money to work" like they did in the internet sector in 1999, or the housing market in 2005.

There also happen to be quite a few central banks in there too. For them, the return on investment is not the primary reason for buying.


On Oct 16 10:22 AM Joseph L. Shaefer wrote:

> When given a choice of trusting government pronouncements, brokerage
> research or the actual actions of professionals and amateurs putting
> their money to work, the intelligent investor looks to see what the
> last group are actually doing. All the fudging by government economists
> and screeching from brokers and the financial press are just that.
> The bond market will, in the aggregate, predict short-term inflation
> and deflation, if only we will listen to what it is saying...

Oct 16 11:52 AM

[markfl:]

Bloomberg reported:
"Fed Vice Chairman Donald Kohn this week said inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an 'extended period.' His concerns echoed those of New York Fed President William Dudley."
www.bloomberg.com/apps...

This echoes FOMC sentiments that display concerns over disinflation, so long as consumer demand is weak. Strict monetarists might disagree, but, regardless, low inventories could still spark inflation in case of a sudden and unexpected demand spurt.

Oct 16 11:54 AM

[watchthedow...:]

The TIPs market in its limited history has arrived to the party just on time (not early), so I would not look to anything in terms of guidance here outside of the general trend.

The stock market and the treasury bond market historically have been very late to the party (looking all the way back to 1909).

The only group historically early to the party have been gold miners, and they are flashing caution in a big way (as it relates to future possible above-average inflation)

Oct 16 01:54 PM

[bobbybutte:]

Actually what teh Chinese is doing is more relevant and they will not do anything not in their best intreest take it for what its worth

Oct 16 02:16 PM

[Mr. Big:]

Let's see.... we have the USD on a weakening trend and will continue to weaken unless the government gets its fiscal house in order (or at least have credible plans to do so). We have some signs that the economy is starting to bottom. Oil prices are higher....energy prices, commodities....anything that the US imports....are more expensive. No credible heathcare plan in place. No energy plan. Social security still a mess. A $1.5 trillion deficit....

And yet... bondholders continue to demand US paper? They ask for no compensation for a weakening currency? They assume there is ZERO risk to fiscal stability? The US is an import nation....and all prices have just gone up from the weakening dollar.....yet only 1.75% inflation? Geeez...... I think I have a portfolio of sub-prime mortgage backed securitized notes to sell to these people at par.

Oct 16 04:39 PM

[Plan B Econ...:]

The irony is that inflation, as manifested by a weak USD, has already eroded the real returns to US bond holders.

The hyperinflation tipping point:
www.planbeconomics.com.../

Oct 17 12:04 AM

[lorddarley:]

The massive buyers of our debt are not shrewd private institutions. Is PIMCO buying US debt? Hardly.

This is a war of exporting governments, forced to prop the dollar to support their own export-led economies. Gradually, as the world economies improve, and as they sell more to each other and rely less on the US market, their intervention will cease. US interest rates will soar. That is as sure a bet as you can find on this planet.

Oct 17 08:48 AM

[d.a.n:]

The federal and non-federal debt is near (if not already) untenable.
The total $11.9 Trillion Federal Debt per-capita is over 60% higher than it was after World War II.
The total current $57 Trillion Nation-Wide has grown from 100% of GDP in year 1956 to over 420% of GDP today.
Gold prices are a clue.
Inflation is being reported at ZERO or less, but it's really much higher.
Inflation calculations were modified in 1983 and 1998 to make inflation look less severe.
ShadowStats.com shows different unemployment, inflation, debt, and other statistics, but they are considered suspect by many.
Yet, more people are unemployed today than were unemployed during the Great Depression.
Many stocks are only looking somewhat better only after laying off millions of workers.
Yet, despite being told inflation is near ZERO, I have not seen the cost of living falling one bit; in fact many costs have been increasing significantly.

At any rate, the voters have the government that they elect, and re-elect, and re-elect, . . . , at least, until repeatedly rewarding failure and these 10 abuses, and repeatedly rewaring incompetent, FOR-SALE, and corrupt incumbent politicians with cu$hy 85%-to-90% re-election rates finally becomes too painful; when enough Americans are bankrupt, jobless, homeless, and hungry?

Oct 17 09:42 AM

[John Lounsbury:]

Prof. Perry - - -

Good reporting.

Commenters - - -

We have a variety of disagreements, but that is okay - we are all experts now. And we are probably all correct, with only the timeline to differentiate us.

Oct 17 09:55 AM

[wg:]

The only sane reason for an individual to invest in U.S. treasuries is if he has so much money that the pitiful interest will still bring in more than he can possibly spend each year. At least he will be as safe as he can probably get.

For the rest of us, my though would be, stay very, very flexible. We are being stalked by an animal that nobody has really ever seen before, and is very unpredictable.

Oct 17 09:58 AM

[lorddarley:]

I do want to follow up on my recent comment. In that, I noted that many of the purchasers of US debt were foreign export countries. I did not mention, and it's probably needless to say, that the biggest purchaser of our debt is Ben B.

In today's Barrons, it is noted that the US is buying 75% of its issued debt!!! It's an effort, through the printing press, to keep rates (especially mortgage rates) low, and to pump the economy.

That is a little bit head spinning, But the basic premise of Mark's article (sorry Mark) was that low rates means that a "market" has judged against accelerating inflation for our future. This is simply market manipulation by governments. The US consumer has the loss of purchasing power (my own term for inflation, which is a manipulative concept) in his or her destiny.


On Oct 17 08:48 AM lorddarley wrote:

> The massive buyers of our debt are not shrewd private institutions.
> Is PIMCO buying US debt? Hardly.
>
> This is a war of exporting governments, forced to prop the dollar
> to support their own export-led economies. Gradually, as the world
> economies improve, and as they sell more to each other and rely less
> on the US market, their intervention will cease. US interest rates
> will soar. That is as sure a bet as you can find on this planet.

Oct 17 12:20 PM

[Blair:]

I think, as stated elsewhere, the big clue is precious metals, plus other commodities.

From my perspective, I am investing in PM because what is going on from a monetary consideration doesn't make any rational sense.

Oct 17 04:35 PM

[rennert:]

It is unbelievable how every thing from groceries to doc and vet has gone up. What planet are those people living on that tell us there is no inflation? Of course their Butler is doing all their buying for them while they dine at the splendidly delicious Hedge Fund Cafe up in the sky overlooking Washington and Wallstreet..

Oct 17 08:33 PM

[Kinetics63:]

We will see if you are correct in that observation very soon.

Have you mortgaged your house and shorted the Long Bond with the proceeds? :)


On Oct 16 10:36 AM Dave Wrixon wrote:

> The Bond Market simply reflects that Bernanke is buying all the bonds.

Oct 17 10:38 PM

[Tetrapod:]

Are you kidding? Have you priced an Apple 2e or a Commodore 64? Dirt Cheap! After you adjust for headrests, seat-belts, airbags, power windows and locks, CD player, catalytic converter, padded steering wheel, and all the other stuff that cars didn't have in 1964, cars are pretty cheap too! Same thing with food when you adjust for the cost of all the saturated fats and additives! ;-)

On Oct 17 08:33 PM rennert wrote:

> It is unbelievable how every thing from groceries to doc and vet
> has gone up. What planet are those people living on that tell us
> there is no inflation? Of course their Butler is doing all their
> buying for them while they dine at the splendidly delicious Hedge
> Fund Cafe up in the sky overlooking Washington and Wallstreet..

Oct 19 04:52 PM

[Alok Swain:]

Excellent sarcasm!


On Oct 19 04:52 PM Tetrapod wrote:

> Are you kidding? Have you priced an Apple 2e or a Commodore 64? Dirt
> Cheap! After you adjust for headrests, seat-belts, airbags, power
> windows and locks, CD player, catalytic converter, padded steering
> wheel, and all the other stuff that cars didn't have in 1964, cars
> are pretty cheap too! Same thing with food when you adjust for the
> cost of all the saturated fats and additives! ;-)
>
> On Oct 17 08:33 PM rennert wrote:

Oct 21 11:04 PM