Monday, 25 August 2008

Who's afraid of inflation?

Apparently, not government bond investors.

The chart below shows that yields on 10-year government bonds in the major economies are either below or barely above the respective inflation rates.
Why are investors willing to ignore the persistently high inflation around the world? One reason is the distress in credit markets that refuses to go away. From Bloomberg:

Most of the bond strategists and salesmen that Resolution Investment Management Ltd.'s Stuart Thomson talked to last August expected the credit crunch to be long over by now. Instead, money markets show there's no end in sight, and it may even worsen...

Banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

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