Expectations about inflation/deflation are a critical factor for handicapping the future in terms of broad price trends, as we discussed in the previous post. Hold that thought as you consider that 5-year inflation-indexed Treasuries sold at a negative yield for the first time, according to Bloomberg.
What does it mean? “It signals people’s expectation of the Fed being able to create some inflation with the QE program,” according to Alex Li, an interest-rate strategist at Deutsche Bank. “With nominal rates so low, in order have high TIPS breakevens you’ve got to have negative real yields on the five-year.”
The Bloomberg article reports that “the securities drew a yield of negative 0.55 percent.” That inspires Keith Blackwell at the Royal Bank of Canada in New York to advise: “With more quantitative easing the likelihood of a deflation scare over the short term has decreased significantly, as the Fed is committed to upping inflation expectations.” In other words, “TIPS look much more attractive.”