Inflation Worries Fade As Real Yield Rises

It’s no surprise to learn that inflation expectations have been pounded downward in the wake of the financial crisis, although the magnitude of the drop may still turn a few heads.

Consider the outlook for consumer prices embedded in the spread between the nominal and inflation-indexed Treasury, as per our chart below. Mr. Market is now anticipating that consumer prices will rise a mere 1% a year for the next decade, down from nearly 2.6% as recently as this past July.

Dow Inflation Chart

The source of this massive and sudden change of heart needs no explanation other than to point to the events of the past two months. Meanwhile, amid all the turmoil and fading of inflation worries an investor can, as of last night’s close, buy a 10-year inflation-indexed Treasury at a real yield of 2.59%, as our second chart below shows. That’s shy of the October 14 close of 3.05%, although it’s still high by recent standards. At one point during this past March, the 10-year TIPS yielded a scant 90 basis points.

Real Yields

The opportunity to lock in a real yield of 3%, or something close to it, shouldn’t be dismissed lightly. Indeed, a nominal 10-year Treasury currently yields 3.65%, a mere 106 basis points over its TIPS counterpart.

Inflation, of course, is a dead issue at the moment, as the crowd so clearly believes. What’s more, it’ll probably be some time, perhaps several years, before pricing pressures return with any great force. Disinflation, or worse, is upon us.

All of which only goes to remind that the best deals in the investing game typically come joined at the hip with frightening headlines and gloomy expectations for the assets in questions. Some things, at least, never change. Prices, by contrast, are always in flux. The only task, then, is figuring out if going rate is attractive, and that starts by comparing it with what the crowd was accepting in the past.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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