Saturday, December 15, 2007

People Own These?

"The sharp drop in Treasury-bond yields lately suggests inflation isn't a big concern to investors. ... [T]he yield of the 10-year Treasury note has dropped to 4.169% yesterday from 5.297% in June, even as headline inflation has moved higher", Scott Patterson in the WSJ, 14 December.

To get a 2.5% "real rate of return" from a "riskless" asset implies the Treasury market predicts inflation will average 1.669% (4.169% - 2.500%) over the next ten years! Does anyone believe that? What's going on here? I see no reason to own long-dated Treasury paper at these rates.

No comments: