Forget the Doom and Gloom! TIPS Yields Say NO Inflation or Stock Market Decline

Real yields on TIPS are very good indicators of the bond market’s growth and inflation expectations. Currently they are telling us that the bond market expects sub-par growth and no significant increase in inflation. Words: 401

In further edited excerpts from the original article* Scott Grannis (scottgrannis.blogspot.com/) goes on to say:

I detect NO sign that the bond market is unusually concerned about future inflation:

a) 5- and 10-year breakeven spreads are in the range of 2.25-2.35%, which is actually lower than the 2.45% that the CPI has averaged over the past 10 years

b) the 5-year, 5-year forward breakeven spread is about 2.65%, again very much in line with what we have seen in the past

c) 10-year Treasury yields today are at the same level (just under 4%) as prevailed during the early 1960s, which was a time when inflation was extremely low and stable—about 1.5% per year

d) the level of yields on 5-year TIPS is consistent with an expectation that real yields on short-term interest rates will be roughly zero

e) the expectation of no Fed tightening, which I define as increasing the Fed funds rate by more than the increase in inflation, is in turn consistent with a view that economic growth is likely to be sub-par (consistent with the popular “new-normal” forecast for 2-2.5% growth). If economic growth were expected to be 3-4% or more one year from now, I have to believe that the bond market today would be expecting at least some modest tightening, if not significant tightening.

f) since there is no reason to believe that the expectations driving the bond market are any different from the expectations driving the equity market, I can further infer that there is NO reason to believe that the equity market is a bubble waiting to pop. The capital markets today are priced to very conservative and unexciting assumptions about the future.

*http://seekingalpha.com/article/199713-in-bond-market-slow-growth-little-inflation-risk?source=email

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