Treasury yields and inflation expectations are disconnected

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Treasury yields and inflation expectations are disconnected

Post by willthrill81 »

Historically, there has been a fairly strong relationship between Treasury yields and forward inflation expectations. Even throughout the high inflation of the late 1970s and early 1980s, only once did Treasury bills lag inflation by more than 1% annualized (see here).

However, the chart below, sent to me today by David Stein of the Money for the Rest of Us podcast, indicates that this relationship appears to be broke. Since early 2020, 5 year forward inflation expectations have risen sharply from about 1.2% to over 2.2% now while 10 year Treasury yields have only increased from just over 1% to about 1.4%.

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Are there any clear reasons for this apparent and notable change? If it endures, it's seemingly bad news for those holding Treasuries.
Last edited by willthrill81 on Wed Sep 22, 2021 6:14 pm, edited 1 time in total.
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Re: Treasury yields and inflation expectations are disconnected

Post by SafeBonds »

Can you throw in TIPS yields into this chart? Seems like without that you could simply say real yields were stable and around 2020 real yields went down.
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Re: Treasury yields and inflation expectations are disconnected

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SafeBonds wrote: Wed Sep 22, 2021 6:04 pm Can you throw in TIPS yields into this chart? Seems like without that you could simply say real yields were stable and around 2020 real yields went down.
It effectively shows the same thing.

Image

However, the chart in the OP shows that nominal yields were tracking inflation expectations remarkably well, then the tracking almost ceased entirely.

Why did the market suddenly become willing to accept Treasury yields well below inflation?
Last edited by willthrill81 on Wed Sep 22, 2021 6:13 pm, edited 1 time in total.
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Re: Treasury yields and inflation expectations are disconnected

Post by L84SUPR »

A combination of monetary and fiscal policy in response to covid?

The chart does not go back to 2008 so it is not possible to see if a similar response occured with QEs 1 thru 3.
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Re: Treasury yields and inflation expectations are disconnected

Post by sc9182 »

Good post!

It’s indirectly denotes “negative interest rates” . Many EU counties have negative yields on respective Govt securities., while we don’t., the result is not much different.

None of this is being helped by Fed buying up Treasuries and Bonds either — why would treasury/bond yield has to be much — when there is that much demand (partly helped by Fed buying up these) ..

Worse yet - Bonds are not yielding much - so there is higher demand for Treasuries and their safety. Now that treasuries not yielding much - Bond issuers are getting away with slightest premium over treasuries and still be able to fully sell their bonds. Currently, it’s a negative death spiral for yield.
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Re: Treasury yields and inflation expectations are disconnected

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L84SUPR wrote: Wed Sep 22, 2021 6:13 pm A combination of monetary and fiscal policy in response to covid?
So the bond market expected an increased inflation rate without anything approaching a commensurate increase in yields?
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Re: Treasury yields and inflation expectations are disconnected

Post by L84SUPR »

willthrill81 wrote: Wed Sep 22, 2021 6:09 pm
SafeBonds wrote: Wed Sep 22, 2021 6:04 pm Can you throw in TIPS yields into this chart? Seems like without that you could simply say real yields were stable and around 2020 real yields went down.
It effectively shows the same thing.

Image

However, the chart in the OP shows that nominal yields were tracking inflation expectations remarkably well, then the tracking almost ceased entirely.

Why did the market suddenly become willing to accept Treasury yields well below inflation?
When did the Fed say that target inflation was an average of 2 percent and they would tolerate 3 percent for some time before reacting? Would that change inflation expectations?
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Re: Treasury yields and inflation expectations are disconnected

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L84SUPR wrote: Wed Sep 22, 2021 6:19 pm
willthrill81 wrote: Wed Sep 22, 2021 6:09 pm
SafeBonds wrote: Wed Sep 22, 2021 6:04 pm Can you throw in TIPS yields into this chart? Seems like without that you could simply say real yields were stable and around 2020 real yields went down.
It effectively shows the same thing.

Image

However, the chart in the OP shows that nominal yields were tracking inflation expectations remarkably well, then the tracking almost ceased entirely.

Why did the market suddenly become willing to accept Treasury yields well below inflation?
When did the Fed say that target inflation was an average of 2 percent and they would tolerate 3 percent for some time before reacting? Would that change inflation expectations?
I believe that the Fed changed their goal to 2% average inflation back in August of 2020.
Last edited by willthrill81 on Wed Sep 22, 2021 6:57 pm, edited 1 time in total.
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Re: Treasury yields and inflation expectations are disconnected

Post by L84SUPR »

willthrill81 wrote: Wed Sep 22, 2021 6:17 pm
L84SUPR wrote: Wed Sep 22, 2021 6:13 pm A combination of monetary and fiscal policy in response to covid?
So the bond market expected an increased inflation rate without anything approaching a commensurate increase in yields?
It looks like the separation began before covid so it looks like my previous statement doesn't hold up. I'm try to remember when the Fed said that target inflation was an average of 2 percent and they would tolerate 3 percent for some time before reacting? Would that have changed inflation expectations?
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Re: Treasury yields and inflation expectations are disconnected

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L84SUPR wrote: Wed Sep 22, 2021 6:24 pm
willthrill81 wrote: Wed Sep 22, 2021 6:17 pm
L84SUPR wrote: Wed Sep 22, 2021 6:13 pm A combination of monetary and fiscal policy in response to covid?
So the bond market expected an increased inflation rate without anything approaching a commensurate increase in yields?
It looks like the separation began before covid so it looks like my previous statement doesn't hold up. I'm try to remember when the Fed said that target inflation was an average of 2 percent and they would tolerate 3 percent for some time before reacting? Would that have changed inflation expectations?
I noted above that it appeared that the Fed changed their position back in August of 2019.
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Re: Treasury yields and inflation expectations are disconnected

Post by alex_686 »

L84SUPR wrote: Wed Sep 22, 2021 6:19 pm When did the Fed say that target inflation was an average of 2 percent and they would tolerate 3 percent for some time before reacting? Would that change inflation expectations?
IIRC, the newish target is a cumulative 2%. So if inflation has been running below 2% for a couple of years they would be happy for it to be above for a few years.

Also I think they might toss this year's inflation. Or at least give it a low weight. Most people are operating under the assumption that the current spike in inflation is a one time time due to restarting post COVID shutdown. If that isn't true - well, then it will probably be kept in.
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Re: Treasury yields and inflation expectations are disconnected

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willthrill81 wrote: Wed Sep 22, 2021 6:28 pm I noted above that it appeared that the Fed changed their position back in August of 2019.
About the time your curves in the OP diverged. Coincidence?
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Re: Treasury yields and inflation expectations are disconnected

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alex_686 wrote: Wed Sep 22, 2021 6:28 pm Also I think they might toss this year's inflation. Or at least give it a low weight. Most people are operating under the assumption that the current spike in inflation is a one time time due to restarting post COVID shutdown. If that isn't true - well, then it will probably be kept in.
Toss something that's abnormal seems fraught with peril to me. 2008-2009 was abnormal but very real. The inflation we're seeing almost across the board is abnormal but very real. And that's aside from whether the current inflation is 'transitory' or not.
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Re: Treasury yields and inflation expectations are disconnected

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Doc wrote: Wed Sep 22, 2021 6:32 pm
willthrill81 wrote: Wed Sep 22, 2021 6:28 pm I noted above that it appeared that the Fed changed their position back in August of 2019.
About the time your curves in the OP diverged. Coincidence?
No, the divergence was in early 2020, more than six months later.
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Re: Treasury yields and inflation expectations are disconnected

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Rate repression is real and markets are not as unconstrained to correctly set asset prices as some would like to believe.
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Re: Treasury yields and inflation expectations are disconnected

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Doc wrote: Wed Sep 22, 2021 6:32 pm About the time your curves in the OP diverged. Coincidence?
The chart's labels are ambiguous. The years are centered underneath their three/four quarters, and the ticks at the year boundaries are ever so slightly longer than at the quarter boundaries. The divergence starts near the end of Q1 2020.
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Re: Treasury yields and inflation expectations are disconnected

Post by tomsense76 »

willthrill81 wrote: Wed Sep 22, 2021 6:24 pm I believe that the Fed changed their goal to 2% average inflation back in August of 2019.
Was that meant to be 2020?
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Re: Treasury yields and inflation expectations are disconnected

Post by drk »

willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Not proof-positive, but mid-March 2020 is exactly when the Fed started to ramp up QE and its lending/liquidity facilities.
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Re: Treasury yields and inflation expectations are disconnected

Post by alex_686 »

willthrill81 wrote: Wed Sep 22, 2021 6:33 pm
alex_686 wrote: Wed Sep 22, 2021 6:28 pm Also I think they might toss this year's inflation. Or at least give it a low weight. Most people are operating under the assumption that the current spike in inflation is a one time time due to restarting post COVID shutdown. If that isn't true - well, then it will probably be kept in.
Toss something that's abnormal seems fraught with peril to me. 2008-2009 was abnormal but very real. The inflation we're seeing almost across the board is abnormal but very real. And that's aside from whether the current inflation is 'transitory' or not.
Why?

If inflation is increasing and accelerating then they should probably increase interest rates and tamp down the economy to prevent overheating. Increasing interest rates in the future won't affect the speed bump that we are driving over now.

The Fed can't change the past, only influence the future.

I could go on. There are a whole range of inflationary influences that the Fed should ignore. Produce prices are increasing where I am because of the summer drought. Should the Fed raise inflation to combat those price increases? No, those are legitimate price increases due to supply issues. Same for lumber.

Note, I am not saying we should excluded all of the problematic areas or completely ignore the current surge. But the Fed does not have the tools to fix general inflation. They have tools to fix (or at least influence) specific causes of specific types of inflation.
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Re: Treasury yields and inflation expectations are disconnected

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tomsense76 wrote: Wed Sep 22, 2021 6:52 pm Was that meant to be 2020?
+1
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Re: Treasury yields and inflation expectations are disconnected

Post by steve r »

Today the Fed announced it's own inflation expectation are for inflation fractionally above 2 percent through 2024.

https://www.reuters.com/article/usa-fed ... SL1N2QO1E8

Not so transitory.
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Re: Treasury yields and inflation expectations are disconnected

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tomsense76 wrote: Wed Sep 22, 2021 6:52 pm
willthrill81 wrote: Wed Sep 22, 2021 6:24 pm I believe that the Fed changed their goal to 2% average inflation back in August of 2019.
Was that meant to be 2020?
Yes, you're correct.

That was months after the disconnect between yields and inflation expectations began though.
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Re: Treasury yields and inflation expectations are disconnected

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alex_686 wrote: Wed Sep 22, 2021 6:55 pm
willthrill81 wrote: Wed Sep 22, 2021 6:33 pm
alex_686 wrote: Wed Sep 22, 2021 6:28 pm Also I think they might toss this year's inflation. Or at least give it a low weight. Most people are operating under the assumption that the current spike in inflation is a one time time due to restarting post COVID shutdown. If that isn't true - well, then it will probably be kept in.
Toss something that's abnormal seems fraught with peril to me. 2008-2009 was abnormal but very real. The inflation we're seeing almost across the board is abnormal but very real. And that's aside from whether the current inflation is 'transitory' or not.
Why?

If inflation is increasing and accelerating then they should probably increase interest rates and tamp down the economy to prevent overheating. Increasing interest rates in the future won't affect the speed bump that we are driving over now.

The Fed can't change the past, only influence the future.

I could go on. There are a whole range of inflationary influences that the Fed should ignore. Produce prices are increasing where I am because of the summer drought. Should the Fed raise inflation to combat those price increases? No, those are legitimate price increases due to supply issues. Same for lumber.

Note, I am not saying we should excluded all of the problematic areas or completely ignore the current surge. But the Fed does not have the tools to fix general inflation. They have tools to fix (or at least influence) specific causes of specific types of inflation.
I'm saying that all inflation 'matters', whether it's 'transitory' or not. 'Tossing' data that seem abnormal for whatever reason is problematic.
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Re: Treasury yields and inflation expectations are disconnected

Post by tomsense76 »

willthrill81 wrote: Wed Sep 22, 2021 6:57 pm That was months after the disconnect between yields and inflation expectations began though.
Agreed. Do you happen to know what month the disconnect began? Looking at the chart my best guess is March 2020, but I'm not confident that I'm reading that correctly.
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Re: Treasury yields and inflation expectations are disconnected

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tomsense76 wrote: Wed Sep 22, 2021 7:02 pm
willthrill81 wrote: Wed Sep 22, 2021 6:57 pm That was months after the disconnect between yields and inflation expectations began though.
Agreed. Do you happen to know what month the disconnect began? Looking at the chart my best guess is March 2020, but I'm not confident that I'm reading that correctly.
That looks to be the right time to me.

It makes sense that inflation expectations increased when the Fed starting 'printing' more money in response to COVID. But it isn't clear to me why bond yields didn't respond in kind.
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Re: Treasury yields and inflation expectations are disconnected

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I’m not sure I see such an obvious relationship or pattern.

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Re: Treasury yields and inflation expectations are disconnected

Post by Lee_WSP »

Seems like a supply and demand disconnect. I have a strong feeling that QE is involved.
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Re: Treasury yields and inflation expectations are disconnected

Post by Beensabu »

Why is the 10-year treasury rate being compared to the 5-year expected inflation rate in that chart? Why not the 10-year expected inflation rate?

Edit: LOL. Nevermind. I just figured out what "5 year, 5 year forward inflation expectation rate" means :oops:
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Re: Treasury yields and inflation expectations are disconnected

Post by Dontridetheindexdown »

U.S. Treasury yields (for any specific time period) are based on the entire world's confidence in a risk-free rate-of-return during that time period.

U.S. inflation projections are predictions of too many dollars chasing too few goods, for specified goods within the U.S., during a specified time period.

As economists would say, solve for the equilibrium.

It should be obvious that U.S. Treasury yields are in no way a predictor of inflation.

Consider also the possibility of recession, with too few dollars chasing too many goods, and any possible relationship to the risk-free rate-of-return.
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Re: Treasury yields and inflation expectations are disconnected

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Dontridetheindexdown wrote: Wed Sep 22, 2021 9:04 pm It should be obvious that U.S. Treasury yields are in no way a predictor of inflation.
That hasn't been the case for most of U.S. history.
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Re: Treasury yields and inflation expectations are disconnected

Post by Oicuryy »

willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Sure, nominal yields were pulled down by the drop in real yields.

Image
https://fred.stlouisfed.org/graph/?g=GZzX

Image
https://fred.stlouisfed.org/graph/?g=GZFt

The question we should be asking is why have real yields been falling since the great recession?

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Re: Treasury yields and inflation expectations are disconnected

Post by alex_686 »

So I learned today that the Fed is probably targeting the "Trimmed Mean PCE Inflation Rate". The same philosophical impulse as "Core Inflation" (Standard CPI less food and energy) but with different - and hopefully better - logic and math than core.

https://fred.stlouisfed.org/series/PCETRIM1M158SFRBDAL
willthrill81 wrote: Wed Sep 22, 2021 6:59 pm I'm saying that all inflation 'matters', whether it's 'transitory' or not. 'Tossing' data that seem abnormal for whatever reason is problematic.
Think ocean freighter. not sports car.

So the counter to that is that the tools that the Fed has are slow, heavy handed, and limited. Can't emphasis that enough. Their decision will have multiple and unforeseen impacts. The CPI data they use tend to lag badly from the underlying economic forces.

They have give up the idea of "fine tuning" the economy. That idea was blow to bits in the 70s. So big slow movements.

The decisions made today won't have a economic impact for months so you need to think what will happen in the future. The economy is complex. As Bogleheads always say about predicating the future, nobody knows nothing.

As such, it is a conservative institution So they are only going react when they have a high conviction that their actions will have a positive impact.
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Re: Treasury yields and inflation expectations are disconnected

Post by NiceUnparticularMan »

Oicuryy wrote: Wed Sep 22, 2021 9:42 pm
willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Sure, nominal yields were pulled down by the drop in real yields.

Image
https://fred.stlouisfed.org/graph/?g=GZzX

Image
https://fred.stlouisfed.org/graph/?g=GZFt

The question we should be asking is why have real yields been falling since the great recession?

Ron
Agreed.

I also note an equivalent question is why have Treasury valuations increased so much?

This is a helpful formulation because the same thing has happened to SP500 valuations. And also U.S. home valuations.

So it might not be so specific to Treasuries. It might be a more general USD-denominated asset issue.
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Re: Treasury yields and inflation expectations are disconnected

Post by secondopinion »

NiceUnparticularMan wrote: Thu Sep 23, 2021 3:18 pm
Oicuryy wrote: Wed Sep 22, 2021 9:42 pm
willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Sure, nominal yields were pulled down by the drop in real yields.

Image
https://fred.stlouisfed.org/graph/?g=GZzX

Image
https://fred.stlouisfed.org/graph/?g=GZFt

The question we should be asking is why have real yields been falling since the great recession?

Ron
Agreed.

I also note an equivalent question is why have Treasury valuations increased so much?

This is a helpful formulation because the same thing has happened to SP500 valuations. And also U.S. home valuations.

So it might not be so specific to Treasuries. It might be a more general USD-denominated asset issue.
Safety carries a premium and growth carries a premium; when the US has both supposedly, then the valuations will increase all together.
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Re: Treasury yields and inflation expectations are disconnected

Post by tomsense76 »

secondopinion wrote: Thu Sep 23, 2021 4:57 pm
NiceUnparticularMan wrote: Thu Sep 23, 2021 3:18 pm
Oicuryy wrote: Wed Sep 22, 2021 9:42 pm
willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Sure, nominal yields were pulled down by the drop in real yields.

Image
https://fred.stlouisfed.org/graph/?g=GZzX

Image
https://fred.stlouisfed.org/graph/?g=GZFt

The question we should be asking is why have real yields been falling since the great recession?

Ron
Agreed.

I also note an equivalent question is why have Treasury valuations increased so much?

This is a helpful formulation because the same thing has happened to SP500 valuations. And also U.S. home valuations.

So it might not be so specific to Treasuries. It might be a more general USD-denominated asset issue.
Safety carries a premium and growth carries a premium; when the US has both supposedly, then the valuations will increase all together.
I thought that was already answered more broadly in this thread ( viewtopic.php?t=278700 ) and related research by the Bank of England over multiple countries and a 700yr time period. TL;DR the long term trend has been down not up. It's the points in time where there was a deviation from that (like the 70s), which are the unusual points not the other way around.
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Re: Treasury yields and inflation expectations are disconnected

Post by Jack&Warren disciple »

Oicuryy wrote: Wed Sep 22, 2021 9:42 pm
willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Are there any clear reasons for this apparent and notable change?
Sure, nominal yields were pulled down by the drop in real yields.

Image
https://fred.stlouisfed.org/graph/?g=GZzX

Image
https://fred.stlouisfed.org/graph/?g=GZFt

The question we should be asking is why have real yields been falling since the great recession?

Ron
There is approximately $17 trillion in Sovereign Debt outstanding that has negative real yields. https://www.marketwatch.com/story/what- ... -treasurys

Japan has struggled for years with negative real yields (could be somewhat related to demographics like aging population with large pools of savings and negative population growth). Germany still has 10 year bund nominal negative yields (they like many western economies have little population growth and since pre WWII hyperinflation was a major cause of social distress have a strong aversion to inflation). Jerome, Ben, and Janet have all stated they think negative nominal rates are not healthy for the US economy.

While I invest in stocks ( VTI) and US rental housing, I can tell you that in 1983, a 30 yr fixed rate mortgage was 13%. Today, I am looking at refinancing for 15 years at around 2% fixed on my principal residence.

Negative real yields result in the cash is trash and the There Is No Alternative investment philosophy. I think this is Central Bankers throughout the world trying to encourage investors to put some of their limited savings into more productive assets than lending it to their sovereigns and they should do so in the hopes of creating more productive assets for society.

I believe that the Fed is looking for a little bit of 'sticky' (around 3%) and not temporary inflation as the BIGGEST FEAR FOR CENTRAL BANKERS SEEMS TO BE A GREAT DEPRESSION, where consumers delay spending and economic activity because they see negative inflation and realize that they can purchase their goods or services for less later.

This what Jerome said yesterday about what the FOMC thinks about inflation: "These bottleneck effects have been larger and longer-
lasting than anticipated, leading to upward revisions to participants inflation projections for this
year. While these supply effects are prominent for now, they will abate, and as they do inflation
is expected to drop back toward our longer-run goal. The median inflation projection from
FOMC participants falls from 4.2 percent this year to 2.2 percent next year."

"Indicators of longer-term
inflation expectations appear broadly consistent with our longer-run inflation goal of 2 percent.
If sustained higher inflation were to become a serious concern, we would certainly respond and
use our tools to assure that inflation runs at levels that are consistent with our goal.
The path of the economy continues to depend on the course of the virus, and risks to the
economic outlook remain. The Delta variant has led to significant increases in COVID-19 cases,
resulting in significant hardship and loss, and slowing the economic recovery. Continued
progress on vaccinations would help contain the virus and support a return to more normal
economic conditions."

https://www.federalreserve.gov/newsevents.htm

If you look at the general direction of nominal interest rates since the 1980's the trend has been downward and I am a wee bit skeptical that the trend is upward from here, but I've been wrong before ;-)
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Re: Treasury yields and inflation expectations are disconnected

Post by rockstar »

I'd go back to 2008. I think, that's when this disconnect started.
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Re: Treasury yields and inflation expectations are disconnected

Post by Northern Flicker »

willthrill81 wrote: Wed Sep 22, 2021 6:02 pm Historically, there has been a fairly strong relationship between Treasury yields and forward inflation expectations. Even throughout the high inflation of the late 1970s and early 1980s, only once did Treasury bills lag inflation by more than 1% annualized (see here).

However, the chart below, sent to me today by David Stein of the Money for the Rest of Us podcast, indicates that this relationship appears to be broke. Since early 2020, 5 year forward inflation expectations have risen sharply from about 1.2% to over 2.2% now while 10 year Treasury yields have only increased from just over 1% to about 1.4%.

Image

Are there any clear reasons for this apparent and notable change?
Yes. Real rates have been low and sometimes negative. Real rates are established primarily by the global balance of supply and demand for bonds.
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Re: Treasury yields and inflation expectations are disconnected

Post by namajones »

"May you live in interesting times."

--ancient Chinese curse (reportedly)

https://en.wikipedia.org/wiki/May_you_l ... ting_times
tomsense76
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Re: Treasury yields and inflation expectations are disconnected

Post by tomsense76 »

Jack&Warren disciple wrote: Thu Sep 23, 2021 8:05 pm If you look at the general direction of nominal interest rates since the 1980's the trend has been downward and I am a wee bit skeptical that the trend is upward from here, but I've been wrong before ;-)
Noted in my comment above, but mentioning here as well. The trend goes way back before the 80s. It's actually a 700yr trend across multiple countries! See this thread for details ( viewtopic.php?p=6241628#p6241628 ). IOW periods with higher inflation/rates are the anomaly.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
NiceUnparticularMan
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Re: Treasury yields and inflation expectations are disconnected

Post by NiceUnparticularMan »

secondopinion wrote: Thu Sep 23, 2021 4:57 pm
NiceUnparticularMan wrote: Thu Sep 23, 2021 3:18 pm I also note an equivalent question is why have Treasury valuations increased so much?

This is a helpful formulation because the same thing has happened to SP500 valuations. And also U.S. home valuations.

So it might not be so specific to Treasuries. It might be a more general USD-denominated asset issue.
Safety carries a premium and growth carries a premium; when the US has both supposedly, then the valuations will increase all together.
Well, "growth" is accounted for by measures like forward-looking earnings. So if valuations are high as a ratio of such measures, necessarily "growth" isn't the explanation per se. Instead, what has happened is the price per unit of "growth" has gone up.

Increased "safety", on the other hand, could in fact explain lower risk premiums and therefore higher valuations. In fact, that is a good hypothesis as to why valuations have been generally increasing over the last many decades (edit: or indeed hundreds of years, as another poster is pointing out).

But it is a little less satisfying when it comes to shorter-term effects like the one observed here. To me that looks more likely to be a normal sort of supply/demand effect, implying there has been a relative increase in USD-denominated capital looking for investment opportunities meeting certain criteria.
Northern Flicker
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Re: Treasury yields and inflation expectations are disconnected

Post by Northern Flicker »

tomsense76 wrote: Fri Sep 24, 2021 3:50 am
Jack&Warren disciple wrote: Thu Sep 23, 2021 8:05 pm If you look at the general direction of nominal interest rates since the 1980's the trend has been downward and I am a wee bit skeptical that the trend is upward from here, but I've been wrong before ;-)
Noted in my comment above, but mentioning here as well. The trend goes way back before the 80s. It's actually a 700yr trend across multiple countries! See this thread for details ( viewtopic.php?p=6241628#p6241628 ). IOW periods with higher inflation/rates are the anomaly.
Rates and inflation higher than the 700-year average are a result of managing the money supply to avoid the crushing depressions that were otherwise part of the economic cycle when there is a relatively fixed money supply.

We don't actually have very much data representative of our current system.
skierincolorado
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Re: Treasury yields and inflation expectations are disconnected

Post by skierincolorado »

A simpler way of asking this question is why are real yields so low.

Real yields were also nearly this low in 2012 and early 2013 (under -0.5%).

There is no fundamental reason why real yields must be positive. There is still a general correlation of nominal yields and inflation, but appears to have been a step-down in 2020, probably related to slower future growth expectations.
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Ocean77
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Re: Treasury yields and inflation expectations are disconnected

Post by Ocean77 »

It is all very simple. Picture yourself as a bond investor. It is widely expected that the Fed will not let rates rise much, so there is limited downside to owning bonds. If bonds fall (yields rise), the Fed is expected to step in and buy bonds. But if the opposite occurs, (yields fall, bond prices go up), i.e. due to a recession, then you have good upside. So: limited downside and significant upside. Compare that to bond alternatives, like CDs (no downside, no upside). No matter what the inflation is, you still need to put your money somewhere. And there is a lot of money out there, after all that money printing. So in the end, even with the paltry yields, bonds still look attractive to many investors here. As proven by current bond prices/yields, so this is not just my personal opinion.
30% US Stocks | 30% Int Stocks | 40% Bonds
tomsense76
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Re: Treasury yields and inflation expectations are disconnected

Post by tomsense76 »

Northern Flicker wrote: Fri Sep 24, 2021 1:22 pm
tomsense76 wrote: Fri Sep 24, 2021 3:50 am
Jack&Warren disciple wrote: Thu Sep 23, 2021 8:05 pm If you look at the general direction of nominal interest rates since the 1980's the trend has been downward and I am a wee bit skeptical that the trend is upward from here, but I've been wrong before ;-)
Noted in my comment above, but mentioning here as well. The trend goes way back before the 80s. It's actually a 700yr trend across multiple countries! See this thread for details ( viewtopic.php?p=6241628#p6241628 ). IOW periods with higher inflation/rates are the anomaly.
Rates and inflation higher than the 700-year average are a result of managing the money supply to avoid the crushing depressions that were otherwise part of the economic cycle when there is a relatively fixed money supply.

We don't actually have very much data representative of our current system.
So this time is different? Just teasing :wink:

Of course the financial system has changed greatly particularly in the last century with the introduction of central banks. Then again in the last 50 with moving away from the gold standard and to the fiat money system and floating rate foreign currency exchanges.

That said, there are still many commonalities. Many of the sharp temporary increases/decreases in the historic data occur during war, plagues, disasters, etc. Deflation has been a difficult problem with pandemics historically. Thus far it seems we are avoiding that fate. Other features like increased savings rates, cautious spending patterns, fewer consumers, and renegotiation of working relationships are certainly happening now as before.

https://www.economist.com/finance-and-e ... emic-booms
https://voxeu.org/article/long-run-effe ... -inflation
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Jack&Warren disciple
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Re: Treasury yields and inflation expectations are disconnected

Post by Jack&Warren disciple »

Northern Flicker wrote: Fri Sep 24, 2021 1:22 pm
tomsense76 wrote: Fri Sep 24, 2021 3:50 am
Jack&Warren disciple wrote: Thu Sep 23, 2021 8:05 pm If you look at the general direction of nominal interest rates since the 1980's the trend has been downward and I am a wee bit skeptical that the trend is upward from here, but I've been wrong before ;-)
Noted in my comment above, but mentioning here as well. The trend goes way back before the 80s. It's actually a 700yr trend across multiple countries! See this thread for details ( viewtopic.php?p=6241628#p6241628 ). IOW periods with higher inflation/rates are the anomaly.
Rates and inflation higher than the 700-year average are a result of managing the money supply to avoid the crushing depressions that were otherwise part of the economic cycle when there is a relatively fixed money supply.

We don't actually have very much data representative of our current system.
Wasn't it Nixon that took the US off the gold standard (I think FDR took all the gold). I wonder if that has anything to do with nominal and real interest rates?
Northern Flicker
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Re: Treasury yields and inflation expectations are disconnected

Post by Northern Flicker »

The relationship of abandoning the gold standard is that it is what provides the ability to manage the money supply to avoid the crushing depressions that had been common. The Long Depression of the late 19th century was in some ways worse than the Great Depression.

If the Fed buying bonds put a lid on noninal rates, inflation expectations can only be priced in by real yields falling. Or you can look at the increased demand for bonds from the Fed raising the price and lowering the yields by a typical supply and demand argument.

But it is more than Fed actions. Higher demand for bonds also seems to be in play with boomers retiring so that their pensions and retirement portfolios are holding more bonds and less stock. Younger savers can buy their stock when they reduce their stock allocation, but cannot supply the bonds that get bought in replacement.
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Re: Treasury yields and inflation expectations are disconnected

Post by TurtleBeatsHare »

This isn't surprising. In fact, it's predictable. The Fed has in effect placed price controls on interest rates through QE. That same QE increases inflation expectations (indeed, it looks like the inflation is occurring primarily through asset inflation in housing and equities). Inflation expectations increase; nominal rates remain low. We'll see how short term bond funds perform in the next 2 years. I'd predict far better than long, but we'll see. I wonder whether they'll outperform equities when taper begins, which should put downward pressure on equity valuations.
Jack&Warren disciple
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Re: Treasury yields and inflation expectations are disconnected

Post by Jack&Warren disciple »

Northern Flicker wrote: Fri Sep 24, 2021 6:46 pm The relationship of abandoning the gold standard is that it is what provides the ability to manage the money supply to avoid the crushing depressions that had been common. The Long Depression of the late 19th century was in some ways worse than the Great Depression.

If the Fed buying bonds put a lid on noninal rates, inflation expectations can only be priced in by real yields falling. Or you can look at the increased demand for bonds from the Fed raising the price and lowering the yields by a typical supply and demand argument.

But it is more than Fed actions. Higher demand for bonds also seems to be in play with boomers retiring so that their pensions and retirement portfolios are holding more bonds and less stock. Younger savers can buy their stock when they reduce their stock allocation, but cannot supply the bonds that get bought in replacement.
"Baby boomers control over 53% of the country's wealth, while Gen X accounts for just over 25% and the silent generation holds around 17%, according to the Fed's data, which breaks down U.S. wealth in the beginning of 2020 by age, class and race.Oct 9, 2020"

https://www.cnbc.com/2020/10/09/millenn ... ealth.html

As we age, most of the sound financial advice recommends higher allocations of savings to bonds versus other investment vehicles (e.g., stocks). Could 70% of America's wealth (Household net worth at the end of the second quarter was $141.7 trillion, the Fed reported. https://www.cnbc.com/2021/09/23/househo ... -well.html) shifting to interest bearing assets be contributing to the decline in nominal interest rates? Seems like this phenomenon would increase the demand for interest bearing accounts across the US bond market.

With approximately $14T in worldwide Sovereign Debt offering the lender LESS THAN their principal back (i.e., negative nominal interest rates) can the US be far behind? Don't know.

But I do know that Ben, Janet, and Yellen are NOT wanting negative nominal interest rates, yet most central bankers worldwide do not want disinflation which causes consumers to pull back spending since the goods and services they seek will be cheaper later...
skime
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Re: Treasury yields and inflation expectations are disconnected

Post by skime »

willthrill81 wrote: Wed Sep 22, 2021 6:09 pm
SafeBonds wrote: Wed Sep 22, 2021 6:04 pm Can you throw in TIPS yields into this chart? Seems like without that you could simply say real yields were stable and around 2020 real yields went down.
It effectively shows the same thing.

Image

However, the chart in the OP shows that nominal yields were tracking inflation expectations remarkably well, then the tracking almost ceased entirely.

Why did the market suddenly become willing to accept Treasury yields well below inflation?
It's not a free functioning market. Fed is buying up supply. A free market wouldn't accept yields as they are.
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