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davepamn davepamn
 
M$1 June 06, 2009 05:19 AM

Does the bond market shows low inflation expectations?

Will bond yields drop reflecting low inflation expectations?
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fazworld fazworld
 
 June 06, 2009 12:54 PM
Bond prices reflect future inflation expectations. Yields move in the opposite direction of prices, so as bond prices increase, yields drop. Recently, the Federal Reserve and Treasury have spent billions of dollars purchasing bond related instruments, including mortgage related securities, with the hope of keeping interest rates low. Low interest rates help borrowers by reducing the costs of home loans, car loans, etc. However recent drops in bond prices (5, 10 year bonds) show an increase in inflation expectations because of this rapid increase in liquidity. Ultimately there is no free lunch and as the Treasury prints money to battle the current downturn, there is growing concern that these huge increases in liquidity (very easy availability of money) will trigger large increases of inflation in the future.
Asker's Rating:
• I don't think the fed spending is over yet.


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davepamn davepamn
 
June 06, 2009 03:10 PM
The fed spent $465 billion purchases in MBS. The plan is to spend $1.25 trillion. The expected result is for every trillion spent on MBS, one percent drop in yield rates. The spending will short term drop rates, a mini recovery will start, and then inflation will rise. I was surprise that the media claimed inflation was rising and the market was looking out years, instead of months, at the potential for inflation.

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legaleagle legaleagle
 
June 06, 2009 02:53 PM
Yes, generally speaking, the U.S. Bond market indicates inflation expectations. If one watches it recently, the price of bonds have declined, raising intertest rates from 5 year to 30 years. Suggesting a rise in inflation.
Source(s):
Barron's Magazine.


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davepamn davepamn
 
June 06, 2009 03:20 PM
1. Will the dollar gain strength against the euro and yen? (Yes) - US economy will stronger in manufacturing than Europe and Japan.
2. Will commodity prices drop as manufacture capacity remains low domestically? (Yes)
3. Has the China economy heated up causing a commodity bull (Yes) but it will be temporary. Will commodity boom last? (No) (Commodities have heated up because the Chinese government is subsidizing but consumption but performance levels can't be sustained long term)
4. Have 5,10,30 bond yields increased (Yes)
5. Has the stock market increased in volume (Yes) Will Stock growth continue into 2011? (No)
6. Has consumer confidence increased (No)
7. Have banks started lending more money (No) Banks are lending to large companies and avoiding medium and small companies
8. Is unemployment still high (Yes)
9. Will there be more unemployment surges (Yes)

Conclusion:
1. Inflation has increased slightly
2. The fed is desparately fighting depression economics
3. Depression economics are the natural consequence of too much debt. Stimulus spending does not stop depression economics. It takes time to heal from debt. Debt is temporary and eventually forgiven or paidoff.

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