Saturday, May 7, 2011

Some Current Positive Short Term Inflation Expectations Evidence (5/5/2011)?

The US Treasury Yield curve exhibited some interesting behavior this week. In particular, the recent short term increasing inflationary trends reversed. This is good short term news for the economy if these trends can persist over the next few weeks.

By reverse engineering the Treasury Yield curve under the assumptions made by Irving Fisher, we can back out current inflation expectations by maturity on a daily basis. The FTS site: BOND TUTOR  provides this information along with the underlying exponential moving average trends.

So what has the current week’s yield curve behavior revealed about inflation expectations?

To answer this we look at the trends for 5-, 7-, 10-, 20- and 30-years and in particular the short (5-years) versus long (30-years). Consider the 5-year first. The two key graphs below are the yellow (daily inflation expectations) and the red graph (exponential moving average). Holding the cursor over the small dot reveals the date and corresponding number. A sharp decline is evident from the yellow spot curve between the dates 5/4/2011 2.42 to 5/5/2011 2.29. This decline broke the exponential moving average (the red curve) from above reversing previous short term increasing trends.

Federal Reserve Bank expectations also influence shorter ends of the yield curve and so the additional
question is whether this behavior was just a trend in the 5-year inflationary expectations?  We can answer this question by checking out the other time series:

By clicking on the sub menu items above reveals the behavior for 7-, 10- 20- and 30-years. The
interesting observation is that all maturities exhibited a sharp decline between these days with the 10-
year maturity being the largest.
Finally, an even better sign is provided if this is accompanied by a significant uptick in the real rates?
The FTS web site also provides this information on a daily basis as well at: BONDTUTOR
The trends here are mixed but encouraging. The dots corresponding to 5/4/2011 and 5/5/2011 reveal
an uptick for the 5- and 7-year series and a slowing decline for the remaining series.

The combined real rate and implied inflation rate trends are positive for the economy if they persist.


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