Friday, October 16, 2009

Bond Market's Expectation of Inflation: 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 market doesn't necessarily share those concerns. According to the inflationary expectations derived from the bond market, future inflation is less of a concern now in 2009 than it was during the 2003-2007 period.

5 Comments:

At 10/16/2009 12:50 PM, Blogger Michael said...

The Fed is printing money, but the bond market doesn't see inflation. I would bet that the bond market doesn't see a recovery either.

 
At 10/16/2009 2:16 PM, Anonymous Norman said...

On the not-so-bright side, the TIP yield of 1.5% is a proxy for what the market thinks real GDP growth, and thus earnings growth, will be over the next ten years.

 
At 10/16/2009 2:37 PM, Anonymous Anonymous said...

Stale data.
~1.99% implied inflation today, per Bloomberg quotes
of 8/15/09 10Y nominal vs. 7/15/09 TIP.
http://bloomberg.com/markets/rates/index.html

 
At 10/16/2009 2:44 PM, Anonymous Anonymous said...

Followup/clarification to prior post: YTM of nominal is 1.38% today, vs. 3.39% YTM of TIP.
Net: 2.01% implied.
A big difference from 1.75%.

 
At 10/18/2009 1:12 PM, Anonymous RSM said...

Not to nitpick Anonymous, but the Professor's comments were based on weekly data. Here is a good link to track daily performance... http://www.bloomberg.com/apps/quote?ticker=usggbe10%3Aind

 

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