Your editor has a 10-year Treasury bond coming due this month, an inflation-indexed one on which I pay Federal but not state and local tax. It has not been a brilliant investment, because I would have earned more (and paid more tax) had I owned a straight T-bond.
Now I must decide if I want to roll it over into another inflation-indexed bond. Given the current economy I swing to no. On the one hand, deficits in the US and lots of other countries mean that there is a risk of inflation taking off again, later if not immediately. But are these bonds, on which the inflation protection is taxed, the best way to handle the price rise risk?
And short-term I am not convinced that inflation is about to turn ugly again. With US unemployment stubbornly high, the odds are against wage demands triggering renewed price hikes. Without higher wages, demand will remain restrained, also keeping inflation under control for now.
However, beware the price of oil, a key cost factor, and other raw materials, which are being pushed up by a combination of Chinese demand, speculation, and, most recently, bad weather. Cost-push inflation is a real risk.
Moreover, some countries have already begun tightening to push up interest rates. Their bond-holders are suffering (because old bond prices fall when new bonds come out with a higher yield.) This is the case for raw-material producers like Norway and Australia, and countries spared the crisis for other reasons, like Israel.
And while the US is not a rickety Latin American populist state like Venezuela or Argentina, where raids on the central bank and devaluations are the order of the day, we are not exactly the homeland of sound monetary policy either. If Washington were to fiddle with the CPI data as Argentina does, it could cut the inflation payout with these bonds.
So when my bond comes due I'll take the cash.