Thursday, December 7, 2017

Mid-Week Bond Market Round-Up

Declining Inflation Expectations 

The University of Michigan's long-run inflation expectations (top chart) and the 10-year CMT-10 year TIPS rate (bottom) chart are both declining.  The University of Michigan's estimate has always been a bit high; it was 3-3.5% in 2012-2014 and has moved lower to 2.5%.  The bond market measure is lower but probably more accurate.  Either way, both have moved lower by about 50-65 basis points in the last 3-4 years, which has important ramifications for Fed policymakers. 

Yield Curve Flattening

Since the beginning of the year, the curve has definitely flattened, with most of the movement coming in the short-end of the curve.

Your New Richmond Fed Presidebt

And Explanation of the New Bond Market Conondrum

Declining inflation expectations
Declining r*
Decreased expectations for a fiscal stimulus and increased perception of economic and political risk.
Decreased term premium