According to the pricing of TIPS and Treasuries, the bond market has decided that we’re likely to see:
- inflation returning to around 2% a year in the near future coupled with
- little hope for any meaningful pickup in the outlook for real economic growth.
By Scott Grannis (scottgrannis.blogspot.ca). (The original article*, as posted on said site under the title TIPS say the deflation “threat” has passed, has been abbreviated below to ensure a fast and easy read.)
5-yr Inflation Expectations
The chart below shows the nominal yield on 5-yr Treasuries, the real yield on 5-yr TIPS, and the difference between the two, which is the market’s expected average annual inflation rate over the next five years. Inflation expectations began to fall last summer, about the same time the oil prices began to decline. They reached a low of 1.2% late last year, and closed today at 1.7% [see UPDATE below].
In spite of the above indications, however, I remain optimistic if only because the market seems to be still so pessimistic. In fact, I’m willing to bet that both growth and inflation will prove higher than expected in the years to come.
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[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and has been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
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