Monday, June 22, 2009
The major trend in the Treasury bond market this year has been a reversal of the deflationary expectations which dominated sentiment at the end of last year. As this chart shows, inflation expectations have risen but are still lower than they were going into this crisis. The market still believes that pervasive economic weakness will keep inflation suppressed.
Forward-looking inflation expectations, meanwhile, have adjusted by more than is reflected in this chart. The Fed's favorite indicator of inflation expectations is the 5-year, 5-year forward inflation rate. That has now returned to 2.4%, which is just about where it was for several years leading up to last summer's financial meltdown. Putting these two observations together, it would appear that the market is expecting the next several years to be tough sledding, with things (inflation and growth) finally returning to normal in, say, 3-5 years from now.
Posted by Scott Grannis at 10:23 AM