Sunday, December 04, 2011

Bond Market's Inflation Prediction Falls Below 2%

The chart above shows the bond market's inflation prediction since the beginning of the year, calculated as the weekly difference between the 10-year regular, nominal Treasury yield (data here) and the 10-year Treasury inflation-indexed yield (a measure of the real interest rate, data here), both on a constant maturity basis.  From a yearly high of 2.62% in mid-April, the proxy for bond investors' inflation outlook has been trending downward, and reached a year-to-date low of 1.82% in late September.  After rising above 2% for three weeks for the last week of October and the first two weeks of November, the inflation expectation spread has been below 2% for the last two weeks.

Notice that the downward trend in the bond market's inflation prediction over the year has been very similar to the downward pattern in the actual monthly rates of inflation from the BPP @ MIT, see post below (link here) and graph below.  


14 Comments:

At 12/04/2011 7:58 PM, Blogger morganovich said...

mark-

that is not an accurate statement. it is the market's assessment of CPI that is reflected in TIPS, not inflation.

i would not bet on CPI either. it's a rigged game where they take out everyhting that goes up in price.

no one sophisticated is buying tips, they are a terrible instrument.

post the annual inflation chart from bpp, and a very different picture emerges.

 
At 12/04/2011 8:35 PM, Blogger Buddy R Pacifico said...

"that is not an accurate statement, it is the market's assessment of CPI that is reflected in TIPs, not inflation."

Here is the one year chart for the ETF TIP. TIP is the iShares Barclays TIPs Bond Fund.

Year to Date Return: 12.51%

Current Yield: 4.2%

The market's assessment of TIP seems to be positive for the last year. TIPs are Treasury Inflation Protected Securities.

 
At 12/05/2011 3:37 AM, Blogger PeakTrader said...

Those who believe inflation is understated or real GDP (real income = real output) is overstated don't seem to understand incomes tend to rise over time, while monthly payments tend to remain fixed or rise less. So, real income rises.

 
At 12/05/2011 4:09 AM, Blogger juandos said...

"...don't seem to understand incomes tend to rise over time, while monthly payments tend to remain fixed or rise less. So, real income rises"...

Well maybe under normal conditions they do...

Some aren't so optimistic...

Three Charts Which Don’t Point to a Recovery

 
At 12/05/2011 5:44 AM, Blogger rjs said...

economist karl smith suggested an interesting way to "pay for" the payroll tax cut; issue 10 year TIPS at their current 0.2% percent real interest rate; after 10 years the $119 billion cost would have risen to $120.4 billion, but that could be paid for then off what should be a much bigger tax base; & if the economy hadnt grown by that time, TIPS rates would likely be negative, reflecting deflation, so the can could be kicked further down the road by issuing more TIPS at a profit...

http://modeledbehavior.com/2011/12/03/funding-the-payroll-tax-cut

 
At 12/05/2011 9:44 AM, Blogger morganovich said...

"TIPs are Treasury Inflation Protected Securities."

not quite.

tips are indexed to CPI.

there is a great deal of selection bias here, as most of those worried about inflation do not believe CPI and therefore would not consider the TIPS an effective hedging instrument.

CPI is not inflation, it is an algorithm intended to try to measure inflation. the map is not the terrain.

if you underweight everyhting going up in price (as CPI does) and then take reduce reported price moves further using completely subjective quality assumptions (that all seem to go in one direction) then you get a number that does not look much like the costs consumers are actually facing.

betting on CPI is not the same as betting on inflation.

most of those deeply concerned about inflation have been focused more on things like gold, up over 22% this year despite big hikes in margin requirements and up 165% in the last 5 years, a 20% compound increase.

 
At 12/05/2011 11:48 AM, Blogger Benjamin said...

Only Morgan sees the rampaging inflation, missed by the BLS, MIT and also by TIPS investors.

In the real world, inflation is dead. The USA is likely entering an era already entered into by Japan, in which the villain is deflation and a too-cautious Federal Reserve.

From 1982 to 2008, the USA experienced many years of prosperity, and moderate and varying inflation, usually between 2 percent and 5 percent.

Now the Fed says we must clamp down on growth whenever we get to 2 percent inflation.

The Fed is suffocating America, and American businesses.

 
At 12/05/2011 12:51 PM, Blogger Buddy R Pacifico said...

Benji writes:

"From 1982 to 2008, the USA experienced many years of prosperity, and moderate and varying inflation, usually between 2 percent and 5 percent.

Now the Fed says we must clamp down on growth whenever we get to 2percent inflation."


"The Fed is suffocating America, and American businesses.

Benji, take a look at this St. Louis Fed graph showing the U.S. monetary base. Do you see any change and if so, is it dramatic beginning in 2008? The growth in money is unprecented.

 
At 12/05/2011 1:05 PM, Blogger morganovich said...

"Now the Fed says we must clamp down on growth whenever we get to 2 percent inflation."

and just where are you getting that wild fantasy bunny?

inflation is nearly twice that and the fed is still running the loosest money in us history.

do you just make this stuff up?

 
At 12/05/2011 1:08 PM, Blogger Benjamin said...

Buddy-

Start reading Money Illusion blog, by Scott Sumner, or Milton Friedman.

Ultra low interest rates and inflation rates are a sign of tight money. You do not get simultaneously low inflation and interest rates through loose money.

The Fed needs an aggressive and sustained QE program that targets results, not amounts. And no more paying interest on reserves.

 
At 12/05/2011 2:11 PM, Blogger Buddy R Pacifico said...

Benji, did youn look at the St. Louis Fed graph? What is your reaction?

"Start reading Money Illusion blog, by Scott Sumner, or Milton Friedman."

Did not Milton Friedman push for a consistent 3% growth in money supply by the Fed?

 
At 12/05/2011 2:35 PM, Blogger Benjamin said...

Buddy-

I think MD did suggest steady money supply growth---but he also told Japan to engage in large and steady QE to fight their perma-gloom.

Really, there is an excellent school of economic thought emerging--Market Monetarism--free of partisan shibboleths. I encourage everyone, including Dr Perry to familiarize themselves with this school.

Times change. We are not fighting the Russkies anymore, and free trade dominates USA markets. It ain't the 1970s, baby. (Although I wish disco and my hair would come back)

 
At 12/05/2011 3:26 PM, OpenID adsanalytics said...

Inflation swap breakevens (chart below) is a better indicator of the market's inflation view as the TIPS breakeven is polluted by its being a cash instrument (note the divergence between swap and TIPS breakevens during the liquidity crisis period in 2008).

http://www.adsanalytics.com/dashboard/docs/dashboard.php?treepage=tree_definition_main.php&chart=chart_inflation_bes

ADS Analytics

 
At 12/05/2011 5:28 PM, Blogger Buddy R Pacifico said...

Benji, I don't know what Market Monetarism is, but will look into it.

So, again I ask for your reaction to the St.Louis Fed graph I linked to.

 

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