Interest rates made a historic move higher last week as the treasury bond market sold off. But is this spike in interest rates previewing a higher move in inflation in the short term? What are breakeven inflation rates saying? Is the FED owning 30% of the TIPS bond market skewing inflation expectations?

What is duration risk in bond portfolios?

How does lower rates extend duration risk in bonds?

Investor expectation of annual returns equal to the current yield to maturity?

2018 when both stocks and bonds via the US Aggregate Total Return Index were negative.

Fed has purchased 30% of the TIPS Treasury Inflation Protected Bond Market

2nd highest precent change in 5-year treasury yields back to 1962.

CPI Consumer Price Index

Weighting of the CPI index components

COVID-19 impact on consumer prices and inflation

5-year breakeven rate inverted with the 10-year breakeven rate

YTD bond funds down even on a total return basis

Mentioned in this Episode:

How do TIPS Treasury Inflation Protected Securities Work?

CPI Consumer Price Index release for January 2021

Understanding TIPS bonds

Explaining negative yielding bonds

Real returns vs nominal returns above inflation

Myths of the 60/40 stock/bond portfolio

Derek Moore’s book Broken Pie Chart

Contact Derek www.razorwealth.com…(read more)

HOW TO: Hedge Against Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Interest Rate Shock! Is Inflation Coming?

The global financial markets are buzzing with speculation about the potential impact of an interest rate shock on the economy. As central banks around the world are preparing for a shift in monetary policy, concerns about rising inflation are surfacing. But what exactly is an interest rate shock, and how does it relate to inflation?

An interest rate shock refers to a sudden and significant increase in interest rates beyond market expectations. Central banks typically use interest rates as a tool to control economic growth, and an unexpected change can have a profound impact on various sectors of an economy. When interest rates rise, borrowing becomes more expensive, leading to reduced consumer spending and investment. This, in turn, negatively affects economic growth.

One of the main concerns associated with a potential interest rate shock is the possibility of inflation. Inflation is the general rise in prices over time and erodes the purchasing power of money. But how are interest rates and inflation related?

When interest rates rise, the cost of borrowing increases. This affects not only individuals but also businesses. Higher borrowing costs can lead to a reduction in investment and expansion, reducing the supply of goods and services in the economy. As a result, prices can rise as demand outpaces supply, leading to inflationary pressures.

Inflation is a complex phenomenon influenced by various factors, such as supply and demand dynamics, input costs, and government policies. However, interest rates play a significant role in shaping inflation expectations. When interest rates are low, borrowing becomes cheaper, promoting spending and investment. This can stimulate economic growth, but it may also increase the risk of inflation if not adequately managed by central banks.

In recent years, central banks worldwide have pursued accommodative monetary policies, keeping interest rates at record lows to support economic recovery from the global financial crisis. However, as economies regain strength and inflationary pressures start to build, central banks are contemplating tightening monetary policy by increasing interest rates to maintain price stability.

The potential interest rate shock and an accompanying rise in inflation have sparked widespread debate among economists and policymakers. Some argue that the massive amounts of stimulus injected into economies during the pandemic, coupled with supply chain disruptions and rising commodity prices, could lead to a sustained increase in inflation. Others believe that the return to pre-pandemic levels of economic activity may temper inflationary pressures, and central banks can effectively manage any potential shocks.

The impact of an interest rate shock and rising inflation on individuals and businesses can be significant. Higher borrowing costs can lead to reduced affordability of mortgages, loans, and other credit products. Businesses, particularly those heavily reliant on borrowing, may face increased costs, potentially requiring them to curtail expansion plans or pass on increased expenses to consumers through higher prices.

For consumers, rising inflation can erode disposable income, making everyday goods and services more expensive. It may result in reduced purchasing power and a decrease in standards of living. Individuals with fixed incomes, such as retirees, may struggle to keep up with rising prices, putting additional strain on their financial well-being.

While the potential for an interest rate shock and rising inflation exists, it is important to note that central banks are closely monitoring the situation. They have pledged to take a gradual approach to monetary tightening and adjust policies as needed to support economic stability. Ultimately, the path of inflation will depend on various domestic and international factors, and the ability of central banks to manage the transition effectively.

In conclusion, the global economy is on the brink of a potential interest rate shock, raising concerns about the possibility of rising inflation. As central banks contemplate a shift in monetary policy, the impact on individuals, businesses, and the broader economy remains uncertain. While the potential for inflation is a real concern, it is important to have faith in the ability of central banks to navigate these challenges and maintain price stability, ensuring a healthy and sustainable economic future.