Frederic S. Mishkin, a Fed governor who is close to Mr. Bernanke, has argued in several recent speeches that some indicators of inflation pressure, like the falling dollar or the yields on inflation-adjusted Treasury securities, are not as ominous as they might appear.
On that note, consider real yields on inflation-protected US bonds, which ended last week negative at all maturities 10 years and shorter, and were only 1.03 percent on 30-year bonds — this after what was widely viewed as a disappointing 30-year auction.
He argues that yields on inflation-linked bonds have been distorted over the past decade by demand from pension funds, which see the bonds as an ideal way to match their liabilities.A third option is that bond investors think today's inflation rates are a blip.
As I write this, it's 2.24 percent, with the yield on inflation-protected bonds actually negative.
There has been a modest pickup in inflation expectations (measured by the difference between the yield on inflation-linked bonds from that on conventional bonds).
Globally the sector yields 3%, higher than the yield on inflation-linked Treasury bonds, despite its history of offering real income growth.
The difference between conventional and index-linked bond yields of the same maturity is roughly equal to expected inflation.The negative yield on inflation-linked bonds is just a corollary of the very low yields on conventional debt.
If five-year Treasury bonds are yielding 1.25%, as they were on November 2nd, then a negative 0.55% real yield on inflation-linked bonds implies an expected inflation rate of 1.8%.
That is equivalent to the real rise in corporate profits, just a bit above the yield on inflation-indexed bonds, and considerably below the current 8.5% yield on REITs, which tends to rise with inflation.
To justify buying into the sector at today's prices it helps to compare the 6% earnings yield on REITs (that's the inverse of the 17 P/E) with the yield on inflation-protected Treasury bonds.
Many advisers say that yields on Treasury inflation-protected securities, known as TIPS, which are indexed to inflation, remain too low.
