Do low long-term interest rates prove that inflation is not a threat?Posted: October 17, 2009
At Carpe Diem, Mark Perry asks:
How could … long-term rates be so low if there were inflationary pressures building up in the economy, which would lead to higher expected future inflation, and higher nominal long-term interest rates, and not historically low long-term rates?
1) Markets are not all-knowing. It is possible that bond traders are accurately predicting the future. It is also possible, however, that the long bond market today is like Nasdaq in the year 2000 or housing in 2006-07, i.e., a massive, inflated, ready-to-burst bubble.
2) Long bonds have performed well during the past 25 years, but have not been strong performers this year. The iShares Barclays 20+ Year Treasury Bond Fund (ticker: TLT) is down 20 percent year to date and has declined 5 percent since the beginning of October. Inflationary expectations are rising, not falling.