Friday, March 4, 2016

The Return of the Inflation Trade

WSJ reports:
The inflation trade is back on Wall Street, thanks to a recent upturn in U.S. economic data and warming investor sentiment.

The 10-year inflation break-even rate, measuring the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, rose to 1.55% Thursday. That is the highest in nearly two months, reflecting strong demand for TIPS.

It's only the beginning. The price inflation ahead will surprise almost all---and it will be the main reason the Fed will be raising interest rates, and not pushing them back down to zero.



  1. The following paragraph of the same WSJ story says that measure hit a seven year low on Feb 11th. So it's bounced off a long term (7 years) low to a short term (2 months) high.

    1. What part of "It's just the beginning" don't you get? Do you think inflation is headed lower from here?

    2. My point as usual is about data presentation and the related. Predicting long term trends from small segments that agree with them is what climate scientists do. It's not a valid way to look at data.

      I have no feelings where inflation is going. For giggles I went to FRED and exported the data for 10yr constant maturity and 10yr TIPS constant maturity and plotted the difference from March 4 2011 to the present. I see nothing indicating this is the up-up and away point for this measure. It's been hitting periodic low points for the last five years, bouncing up and then finding a new lower low. Maybe feb-11 is the bottom for a good long time. Maybe not. It's got a long way to climb just to get back to 2011.

    3. Where the hell do you get the idea that I am predicting long-term trends based on recent data? My point is simply that although WSJ notes a recent return of the "inflation trade" that this is nothing compared to what will occur.

      It's like someone remarking. "Oh look, it's drizzling out." And I remark, not because I think drizzle always leads to major storms, but because I know that a major storm is brewing, that I say, "It's only the beginning."

    4. I get the idea a long (or at least longer than two weeks) term trend is being predicted from the word 'beginning' for you and 'return' in the headline for WSJ. That this is the shifting point.

      So it's drizzling now and by this time tomorrow 8 inches of rain will have fallen? So we expect an inflation spike over next week or month? If not then this isn't the beginning of anything. If it's also not a prediction of a long term trend it's reduced to a harbinger of doom. Like the appearance of a comet in the night sky.

    5. The reference to "Return" in the headline is about the "inflation trade" being back as noted by WSJ. That is stating a fact, not a forecast.

  2. The WSJ article states this measure is an indicator of what bond investors think of the future for inflation. And yes it is a fact of feb-11-16 to the present. It is also a fact that last year by this measure the "inflation trade" returned for five months then declined to lower than where it started and hasn't quite gotten back there yet. That is by this measure bond investors have expectations of lower future inflation now than they did this time last year when the premium was higher. With that perspective there's no indication (without forecasting from recent weeks) that bond investors have come around to your way of thinking of what the future holds by buying TIPS.