Tuesday, December 14, 2010

Are Bond Yields and Interest Rates finally signaling Inflation?

The spectre of inflation has been on every investors lips since the Fed has opened the spigot on their fire hose, pumping liquidity into the market hoping to stave off deflation. But up until now, there really hasn't been the prosperity crushing inflation that pundits have been expecting.

But here are a couple of recent articles that may hint that the time is near for inflation’s return.

First, there’s this piece from Yahoo!’s Tech Ticker which gives a good explanation and background to how rates rise, and what they mean for consumers.

It touches on how the Fed can only directly control the immediate term rates - that is, the rate at which banks can borrow money - and how that indirectly influences short-term interest rates. For example, if banks can borrow money from the Fed at 0.125%, then they can offer lower rates to consumers on loan (in theory), and if the Fed raises their rate, banks would likely raise their rates to keep their profit margin.

But the Fed doesn’t control long term rates, and that’s what the article focuses on most. Essentially, since the Fed is printing money like mad, bond investors are finally getting around to demanding a higher rate of return on the long -term debt. That means rising 30-year mortgage rates and rising yield on the 30 year treasuries.

Which brings us to the second article. This one, titled If Yields Hit this Level, Watch Out for Inflation, is from CNBC. It’s all about the 30-year U.S. Bond rate and how it’s rise to a yield of over 4.7% would likely portend the age of inflation so many media pundits have been warning about.

Time will tell when inflation returns, I just hope we have the leaders in place to do what’s needed to tame it when it does. I don’t believe we’re in for the kind of hyperinflation that would end our civilization as we’ve known it, but I’d hate to see inflation come back so fast that it gets out of control and we’re back to 70’s levels.


Post a Comment