The difference reflects expected inflation, but it also includes a risk premium (to cover the risk of unexpected inflation) and a liquidity premium (because there are fewer RRBs out there than nominals). Usually the riak premium is pretty stable over time and the liquidity premium is so small as to be negligible -- but not always.newguy wrote:I also like to see the difference between the two series as one proxy for inflation expectations.
Yes. The graphs are showing a bigger increase in real rates than in nominal rates. If anything, inflationary expectations are declining a bit. Both of these would be consistent with a phasing out of QE and of Abenomics (as you point out). There is also the torrent of recent commentary, suggesting that investors bail out of bonds.So what do you think is driving the yield spike, real or nominal rates or declining inflation expectations? I know it's all related but I've read a few stories that say it's driven by a change in real rates.
We all know that interest rates will rise in the long run. However, I expect a very gradual increase. I think that what we are seeing these last couple of days is a temporary blip, as investors try to get ahead of the curve, i.e. anticipate future increases.
George