Bond rates and inflation

November 14, 2021 |

why would someone buy a bond paying 2% interest for 30 years if the expected inflation was 5% or more a year? There is a growing fallacy among R's that inflation is going to ruin us. but the bond rate shows that expected and actual inflation is going way down.

This should provide a big boost to d's before the nov 2022 election. and a tremendous disconnect in the way the public is contemplating one of the hypothetical but transitory and ephemeral problems that they attribute to bbb and other boondoggles.

much more salient is the diversity, equity, inclusion tests that are explicit or implicit in all government and masters 100 regulatory capture firms.

it is distressing to see someone like victor hanson and so many other clear thinkers so wrong-headed about the problem of inflation. long term bonds are up in price about 4 pts since sep month end.

the problem with bbb is not increased inflation or deficits but replacement of private control of capital with government, socialism and pork.

Vic's twitter feed

Theodosis Athanasiadis comments:

I believe it is prudent to separate expected inflation and expected real rates when one looks at nominal rates. You can look at the tips and get those numbers. Right now expected inflation that the bond market is pricing is the highest it has been which means that rates have stayed low because of zeroish expected real rates. In other words the bond market is pricing a sort of stagflationary environment for the next 10-30yrs. How likely that is is an open question.

Some other things to keep in mind:
- 30 year rates are weighted averages of future expected inflation. At some point the fed will tighten and this will stabilize inflation creating a mean reversion. This is what drives the yield curve flattening
- bonds historically have offered a crisis protection which in theory means one can hold them even if he expects negative return as a cheaper alternative ie to buying puts


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