Eye Forget

The Prospect of Deflation and What to Do About It

"The best deflation trade that we have found is to be long bonds."

I agreed with this article until I saw the above. Swinging from 30 day paper to 20 year bonds has a lot of time between them. What prices one market has little or nothing to do with the other.

I agree the Fed has no choice but to hold down the short end. However, going forward, the long end is characterized by the Fed's requirement to fund growing deficits during a period China (for that matter, all of East Asia) is redirecting its excess cash internally. In the absence of buyers, the Fed will have no choice but to revert to printing. Whether meaningless backward focusing USG CPI statistics show mild deflation or inflation, at the 20 year end inflation expectations will be built in. Thus, downward price correction in the secondary markets and higher yields.

I think a better place to look is to find vehicles that make money on the spread.