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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: SouthFloridaGuy who wrote (71372)2/3/2007 7:39:55 PM
From: Dan3Read Replies (1) of 306849
 
Re: it doesn't make sense. If economic growth slows, the long bond will rally and the deflationists will be proven right. It's that simple. Even ask Misheldo on this one.

I think that what's being suggested here is that if Bernanke is seen cutting rates without regard to inflation (even if inflation isn't yet serious), bond buyers will not not trust long term bonds and the price of long term bonds will fall (causing long term rates to rise).

This is basically what we had during stagflation - long term rates stayed high simply because no one was willing to assume the risks inherent in loaning money at a fixed rate for a long term. Foreign buyers, in particular, might get spooked and stay spooked, for a long time, regardless of short term drop in inflation. Considering how important foreign sales of long bonds have become, this scenario is quite possible.

We could have a full blown recession with rising long term rates even with waning inflation. Once the inflation genie is out of the bottle, expectations make it hard to put it back in.

Of course, it's important to note that there's no sign of it happening, so far. Buyers can't seem to get enough long term bonds and the yield curve is inverted.
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