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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (1480)	3/21/1999 4:40:00 PM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

Some finance economists look at the difference between the yields on regular 10-year Treasury Bonds with "TIPS" (Treasury Inflation-Protected Securities), as a purely market determined measure of inflationary expectations. Indeed, that TIPS would make such a comparison possible was one of the "selling points" used to get them created in the first place. According to Haver Analytics and Daily Data, since TIPS were first issued, in early 1997, this gap has shrunk from a bit more than 300 basis points to a bit less than 150 points. This latter figure is said to imply that Mr. Market, possessed of more information in the aggregate than any of the rest of us, foresees the average long-term inflation rate, going forward, as about 1.5% annually. This would be consistent with the long-term average, prior to the distorting effects of the U.S.'s 50 years of war economy from 1940 to 1990. To the extent that trends over time are more significant than the supposedly absolute data points at any given moment, it should be noted that the narrowing of this gap was relatively smooth and uninterrupted, until last fall. Then, Russia defaulted, and the gap collapsed, not because TIPS fell in price (actually, they rose), but because Treasuries soared, due to their status as the last deeply liquid, safe-haven financial asset. At its nadir, the gap was only about 50 points, which was consistent with the fears of outright deflation that were prevalent at the time. Since then, the (roughly) 150 basis point gap has been restored, and, in the most recent months, may even be trending wider. porc --''''>