Wednesday, June 10, 2009

Could There Be A Link Between These Two News?

News item 1: U.S. Federal government post record deficit, meaning that supply of Treasuries are record high.

News item 2: U.S. Treasury yields reach the highest level since October last year, with the 10-year yield reaching nearly 4%, meaning that the price of existing Treasuries are plummeting.

Now let's see, what is the usual effect on prices from a higher supply.....?

Given the increase in the spread between TIPS and regular Treasuries, some of that increase also reflects higher inflationary expectations. But that is not really unrelated to the increased deficit as it rightly increases the fear of bond investors that the Fed will try to debase the value of their investments through inflation.


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