Deflationary expectations

The difference between yields on five-year Treasuries and
five-year TIPS was a minus 0.46 percentage point at one point
this week, a record. TIPS typically yield less than Treasuries
because their principal payments rise at the rate of inflation.
A shrinking yield gap indicates investors expect inflation to

The market “is pricing in deep deflation,” said Michael
, an interest-rate strategist in New York at Barclays
Capital Inc. one of the 17 primary dealers that trade directly
with the Fed.

Here is the story

Furthermore this market price indicator, in addition to showing deflationary expectations, has implications for the nature of our current crisis.  The price of oil already has done lots of its falling.  So you might say the market expects the broader monetary aggregates — credit — to be less than robust over coming periods.  I should add (contra Alex) that a rising monetary base, without a robust credit market, won’t get you much inflation.  In fact the base has so risen because the Fed desperately has been trying to prevent…a credit crunch.  Just imagine the credit boom that the observed recent path of the monetary base would have brought if we were not in…a credit crunch.


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