Inflation is Not a Threat

Despite all the ideological finger-wagging, inflation, which never was much of a threat, is now not one at all. Further evidence of the rush to government debt (non-European government debt) from today;s Bloomberg:

The 18-month slump in Treasury zero- coupon bonds is giving way to rising demand as the rate of inflation falls to a 40-year low, turning so-called Strips into the best performers in the U.S. government debt market.

Investment banks increased the securities -- created by separating the interest and principal payments of a bond and selling them at a discount -- by 4.4 percent to $179.4 billion from December through April, according to Treasury Department data. It’s the first time that the market expanded for five straight months since 2006.

The call for Strips, which started in 1985 after former Federal Reserve ChairmanPaul Volcker broke the back of inflation, suggests growing bullishness toward the bond market after the Bank of America Merrill Lynch U.S. Treasury Master Index fell 3.7 percent in 2009. Yields on Treasury Inflation- Protected Securities show money managers expect the consumer price index to increase an average 1.96 percent annually over the next decade, down from 2.43 percent as recently as April 29.

It is worth remembering that 2% inflation is a target for most central banks -- it is not a threat.