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Next Bubble Is Forming: U.S. Government Bonds

CPI - Houseprices - NAIRU - Conundrum - Stabiliseringspolitik -Stagflation - Economics - Demand and Supply - Monetarism

Realräntor - Real Interest Rates

Dagsnoteringar Fed

TIPS in a Rising Interest Rate Environment

Core US inflation is rising and now exceeds 2 per cent.
The 10-year inflation break-even — the rate of inflation at which inflation-linked and fixed income bonds would pay the same, and hence the implicit forecast rate of inflation — is rising.
It is the highest in four years, close to 2.2 per cent; low in historical terms, but above the Fed’s target.
FT 21 April 2018

The 10-year Treasury yield was on a menacing rising trend earlier this year. This broke through the long established downward trend in yields that had lasted since the early-1980s. But that rise in yields has stalled, below 3 per cent.

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Surge in ‘real yields’ could spell danger for stocks

US inflation-linked funds hit in sell-off
Pimco’s Real Return Asset Fund has lost investors 16.1 per cent of their capital in 2013, ranking it as the worst performer in the bond mutual fund universe
Financial Times, June 25, 2013

US bond funds promising to shield investors from the effects of rising prices by buying inflation-linked securities have fallen victim to the worst trade in fixed income markets.

The dire performance for the 203 funds investing in inflation-linked securities, down 7 per cent on average this year, according to Lipper, highlights the volatile nature of what is still a relatively undeveloped market.

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Index-linked bonds currently present the most remarkable features.
For most of their history, such “linkers” have yielded between 2pc and 4pc after inflation, that is, in real terms.
Recently, however, real yields have been negative.
That’s right, investors have willingly held them at yields which are bound to lose money in real terms.

And investors even have to pay tax on the interest.
Roger Bootle, Telegraph 9 June 2013

The debt crisis
Can it be inflated away?
Buttonwood May 22nd 2013


It’s hard to see why the Fed should raise rates until unemployment falls a lot and/or inflation surges,
and there’s no hint in the data that anything like that is going to happen for years to come.

Paul Krugman, New York Times 9 May 2013

Yields in the index linked market remain largely negative at present, which feels distinctly bubble-like
Yet they have been driven down by the perfectly rational fear that extreme monetary measures could lead to inflation
and that inflation could be part of the solution to the developed world’s overhang of public sector debt.

Perhaps this should not really be called a bubble because the protection offered by index linked is invaluable if you fear the worst, even if the security offers a negative real return.
John Plender, FT, January 29, 2013

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John Plender

"I think the greatest bubble that is about to burst is the 10-year and longer Treasury,
because the idea that inflation is gone forever and for all time, and therefore these artificially low rates can last, is silly,"

the president of W.H. Ross & Co. said in an interview
Jeff Cox CNBC.com Senior Writer 21 March 2012

Investors pour money into funds that protect against inflation
FT 5 January 2018

Funds that buy inflation-protected bonds took in a fresh $743m for the week ending January 3

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The UK has seen record levels of demand from investors
for its latest inflation-linked bond syndication.

FT 7 November 2017

Order books for Tuesday’s £3bn, 30-year paper closed at £23.7bn,
making the new 2048 gilt eight times oversubscribed

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The Big Reversal: Inflation And Higher Interest Rates Are Coming Our Way
Charles Hugh Smith/Seeking Alpha, 7 November 2017

Apparently unbeknownst to conventional economists, trends eventually reverse or give way to new trends.

My view is that once this tsunami of new debt-based currency hits the real-world economy, inflation will move a lot higher a lot faster than most pundits believe is possible.

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Real interest rates aren’t particularly low
FT Alphaville 17 August 2017

The current real yield on 10-year Treasury Inflation-Protected Securities is about half of one percentage point
while the current real interest rate on 3-month Treasury bills is about 1.3 percentage points below that.

This spread is narrower than it’s been over the past few years, and far narrower than the post-1980 average.
The performance enjoyed in the recent past probably won’t repeat.

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Residential real estate, not equity, has been the best long-run investment over the course of modern history.
–“The Rate of Return on Everything, 1870–2015” by Jorda, Knoll, Kuvshinov, Schularick, and Taylor


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For the longest time I railed on about the dangers of irresponsible monetary policies. It got so bad that on my ski trips, my pals banned me from talking about Greenspan’s reckless behaviour.

Yet today, I have come around to the idea that the debt problem is so pervasive, there is only way one forward - inflate.
We are going to end up there anyway, so let’s just inflate away the burden and restart with a system that prevents this from ever happening again.
Kevin Muir via The Macro Tourist blog, zerohedge, 7 April 2017

As traders we need to concern ourselves about what is, instead of, what should be.

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Trump’s election has almost certainly ended the 35-year trend of disinflation and declining rates that began in 1981,
and that has been the dominant influence on economic conditions and asset prices worldwide.
But investors and policymakers don’t believe it yet.
Anatole Kaletsky, Project Syndicate 30 January 2017

In today's auction by the U.S. government of $13 billion in 10-year Treasury
Inflation-Protected Securities demand was so great that primary dealers were left with about 16 percent of the bonds,
the lowest on record in data going back to 2003.
Robert Burgess, Bloomberg 19 January 2017 with nice charts

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Flood of money into inflation protected bonds
FT 9 November 2016

Peter Schaffrik at RBC invites investors to play a game of spot the difference in the US Treasury market.

In the bond sell-offs of 2013 and 2015, the difference between the nominal yield on 10-year US Treasurys and the real yield (which strips out the rate of inflation) was minimal, meaning market expectations of inflation were almost non-existent. Today that gap is expansive.

Fears about the damage wrought by inflation have propelled a flood of money into inflation protected bonds, with more than $1bn poured into the funds in the week to October 26 — the second largest weekly total on record, according to data from EPFR.

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Now, some strategists and investors think that the linkers
— inflation-linked government bonds — trade is back on
FT 20 October 2016

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“Many clients I meet worry that the biggest macro risk on the horizon is another financial crisis,”
But the bigger threat is accelerating inflation
Torsten Slok, Deutsche Bank’s chief international economist.
MarketWatch 12 May 2016

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Increasingly hysterical calls for negative interest rates, helicopter money and the like look premature
The era of zero interest rates has a lot longer to run yet.
Real rates of return, traditionally in the 2.5pc to 3pc range, are virtually impossible to come by
Jeremy Warner, 6 Feb 2016

These securities might be the only safe haven left
The yields on some inflation-protected Treasury bonds have doubled since the spring
MarketWatch Oct 19, 2015

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The Great Yield Divergence
When a former Bank of England deputy governor gives a presentation entitled "Are Low Interest Rates Natural?" to a extraordinarily high-powered audience of academics and monetary policymakers, you can bet he will come up with some great charts.
Charlie Bean's historical analysis of long-term real and nominal yields in the UK is amazing: 300 years of UK nominal and real long-term yields
Coppoloa Comment 27 September 2015

Such divergence between nominal and real rates suggests that there is a continual drain of resources from workers to rentiers, from young to old and from poor to rich. This shows itself as rising indebtedness among the young and poor, and increasing fragility of the global financial system.
It cannot possibly be sustainable.

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Why a house-price bubble means trouble
Contrast today’s low-inflation economies with the high inflation of the 1970s and 1980s.
Back then, paying off your mortgage was a sprint: After five years of that, inflation had eroded the value of the debt and mortgage repayments shrank dramatically in real terms.
Today, a mortgage is a marathon.
Interest rates are low, so repayments seem affordable. Yet with inflation low and wages stagnant, they’ll never become more affordable.
Tim Harford, FT 21 November 2014

Expectations for inflation over the next five years,
as measured by comparing yields on Treasury inflation protected securities and those of nominal Treasury bonds,
have approached their double low of June 2013 and December 2011.
FT 23 September 2014

A drop in the so-called break-even rate for the next five years towards 1.62 per cent from 2.1 per cent earlier this summer,
reflects the influence of a stronger dollar and lower commodity prices that have reduced inflationary pressure in recent months.

Speaking on Monday, William Dudley, president of the Federal Reserve Bank of New York said:

“We really need the economy to run a little hot, at least for some period of time” to get inflation back to the central bank’s objective.

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Economic theory discredited

US inflation over the next five years, 1.62 per cent - Ha

How can anyone pretend to know what is happening in five years?
Rolf Englund blog 2014-09-24

The market can stay irrational longer than you can stay solvent.
John Maynard Keynes, (attributed)

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Real rate bonds
Here is how Bob /Robert Hetzel/describes his great idea in his book “The Monetary Policy of the Federal Reserve”:
The Market Monetarist 22 June 2014

In February 1990, Matched-maturity securities half of which would be nominal and half indexed to the price level.
The yield difference, which would measure expected inflation,
would be a nominal anchor provided that the Fed committed to stabilizing it

With a market measure of expected inflation, monetary policy seen by markets as inflationary would immediately trigger an alarm even if inflation were slow to respond.
I mentioned my proposal to Milton Friedman, who encouraged me to write a Wall Street Journal op-ed piece, which became Hetzel (1991).”

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The Monetary Policy of the Federal Reserve

Mr Draghi this time seeks to end the threat of deflation. Will he be equally successful?
Experience suggests that only the brave would bet against him.
Yet to succeed twice would be quite a remarkable achievement.
Martin Wolf, Financial Times June 6, 2014

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At present the world’s high propensity to save is not matched by a desire to invest.
High-income economies have had ultra-cheap money for more than five years. Japan has lived with it for almost 20.
The highest interest rate charged by any of the four most important central banks in the high-income economies is 0.5 per cent at the Bank of England.
Martin Wolf, FT May 6, 2014

These unprecedented policies are needed because of the chronic deficiency of global aggregate demand.

Before the wave of post-2007 crises hit the world economy, this deficiency was met by unsustainable credit booms in a number of economies.

In the case of pension funds, reduced long-term yields are particularly unwelcome because they both lower returns and raise the present value of future liabilities. Many life insurers might be forced out of business if these rates persist. This is a crisis on a long fuse.

Keynes even had a phrase for it – the “euthanasia of the rentier”.

In a world of abundant savings, the available returns ought to be low; this is a consequence of market forces to which central banks are responding.

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Keynes, Krugman, Secular Stagnation and The Death of the Rentiers
Izabella Kaminska, FT Alphaville, 23 January 2014

Martin Wolf

Why are real interest rates so low? And will they stay this low for long?
If they do – as it seems they might – the implications will be profound: good for debtors, bad for creditors and above all, worrying for the vigour of global demand.
Martin Wolf, FT April 29, 2014

The International Monetary Fund’s latest World Economic Outlook includes a fascinating chapter on global real interest rates.
Here are its most significant findings

Strikingly, the 10-year real rate of interest was 4 per cent in the mid-1990s, 2 per cent in the 2000s, before the crisis, and close to zero thereafter.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/c8e5d2a2-cebe-11e3-8e62-00144feabdc0.html#ixzz30OfpuAsQ really big question in such a world is whether conventional inflation targets might be too low, because they do not give enough room for real interest rates to fall as far below zero as necessary.

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Keynes, Krugman, Secular Stagnation and The Death of the Rentiers
Izabella Kaminska, FT Alphaville, 23 January 2014

Martin Wolf

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IMF published a fascinating chapter in its latest World Economic Outlook (WEO) on global real interest rates,
showing that the global real rate has fallen from about 6 per cent in the early 1980s to about zero today.
Gavyn Davies, FT blog April 6, 2014
Highly recommended


The IMF says that the main reason for the drop in real rates in the 1980s and 1990s is obvious: the easing in monetary policy that occurred after the 1979-82 Volcker tightening.


Kommentar av Rolf Englund:
USA:s tidigare centralbankschef Paul Volcker är mest känd för att ha blivit tillsatt av Ronald Reagan för att få ner inflationen, vilket lyckades genom en hård åtramning med recession som följd.
Det ryktet kvarlever med märklig kraft.
Men Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management".
- In the United States, the return to demand management began as early as the summer of 1982, when a three-year recession and the bankruptcy of the Mexican government persuaded the Fed that its experiment with monetarism had gone too far.

Läs mer här


After 2000, the IMF identifies other forces, each of which is associated with a different school of economic thinking:

A drop in investment demand in the advanced economies. This is very similar to the secular stagnation hypothesis, recently advanced by Larry Summers and Paul Krugman.

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Secular stagnation

The global economy could be heading for years of "sub-par growth", according to the head of the International Monetary Fund (IMF).
Christine Lagarde warned that without "brave action" the world could fall into a "low growth trap".
Ms Lagarde also urged more action to tackle low inflation in the eurozone.

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Christine Lagarde, managing director of the IMF, warned of several obstacles to a sustained recovery
including job-killing “low-flation” in the eurozone
Financial Times 2 April 2014

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Lagarde 2014 och Englund 2010 om deflation och inflation
Rolf Englund blog 2014-01-15

- With central bankers afraid to even mention the word “deflation”, Ms Lagarde’s remarks make her the first high profile policy maker to warn that extremely low inflation in rich countries could result in the kind of falling prices that have dogged Japan’s economy for almost two decades. FT 2014-01-15

Riktiga karlar är inte rädda för lite inflation
Kan inflationen bli för hög? Ja, det vet ju alla.
Kan inflationen bli för låg? Javisst, för litet och för mycket skämmer allt,
som jag tror det var Curt Nicolin som sade. Rolf Englund 2010-02-19

Rolf Englund blog 2014-01-15

Riktiga karlar är inte rädda för lite inflation
Rolf Englund blog den 19 februari 2010

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Over the past 12 months, inflation throughout much of the world has dropped like a stone, ending up at levels wholly unanticipated at the end of 2012.
If Japan’s problems partly stemmed from a failure to spot the onset of deflation, might it be that policy makers in the west could be sleepwalking into the very same problem?
Stephen King, Financial Times 13 January 2014

Rather than faster growth leading to higher inflation, lower inflation eventually leads to slower growth. In between, the credit system is slowly asphyxiated.
This was exactly Japan’s experience in the mid-1990s.

The large drop in inflation last year elsewhere in the world may only be a lagged response to earlier economic weakness but,
if that is so obvious now, why was it that no one managed to forecast the drop a year ago?

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Stephen King at IntCom

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Why stagnation might prove to be the new normal
In the past decade, before the crisis, bubbles and loose credit were only sufficient to drive moderate growth
Even if the economy accelerates next year, this provides no assurance that it is capable of sustained growth at normal real interest rates.
Lawrence Summers, December 15, 2013

Daily Treasury Real Yield Curve Rates

Skandia, se Realräntefond

Negative yield of 0.75 per cent
New low for US inflation-protected debt
Financial Times, September 20, 2012

Treasury Inflation Protected Securities, or Tips, came at a negative yield of 0.75 per cent, the lowest on record.

Investors accepted the lowest yields ever for 10-year inflation debt in a US Treasury auction, amid rising expectations the Federal Reserve’s latest move to aid the economy will lead to higher consumer prices.

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Skandia Realräntefond 143,39 SEK 20/9 2012

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10y TIPS
David Glasner is unhappy with Allan Meltzer, who wrote an absurd op-ed in the WSJ in which Meltzer,
among other things, just makes stuff up — claiming that markets are signaling fear of inflation when they are in fact doing no such thing.
Paul Krugman, July 14, 2012

You might think that the complete failure of the predicted inflation takeoff to materialize would at least give him pause. But no: his dogmatism is completely unshaken.

Actually, has even one prominent economist or economic prognosticator who got everything wrong admitted it, or shown even a hint of humility?
Has anyone perhaps hinted that the policy recommendations he was making might not be right, given the total failure of events to go the way he predicted?
I can’t think of one.

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För 20 år sedan inledde Ronald Reagan en våg av skattesänkningar i västvärlden. När USA sänkte sina skatter skärptes trycket på andra att följa efter.
Under en period blundade många i Europa och en rad ekonomer (däribland jag själv) hävdade att Reaganomics var ett oansvarigt tänkande.
Men vi hade fel. USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi.
Klas Eklund på SvD:s ledarsida 2000-08-11


What is the real rate of interest telling us?
The real interest rate on US and UK government debt is currently near to zero
Martin Wolf, FT, 19 March 19 2012

This is a remarkable fact. True, real interest rates were negative in the 1970s. But it is extremely unlikely that anybody bought bonds expecting this to be the case.

Now, however, the position is quite different. Both of these governments sell index-linked debt that delivers zero real returns.

That is a demonstration of the fact that the world has a huge “savings glut”, an idea famously proposed by Ben Bernanke in 2005 (“The Global Saving Glut and the U.S, Current Account Deficit”, March 10 2005,). In

Indeed, since savings must equal investment at the global level, it is only by its price – the rate of interest – that one can assess whether such a glut exists.

The coincidence between the fall in the real rate of interest in 1997-99 and the beginning of the bull market in housing in the US and UK is indeed remarkable. The collapse in real interest rates also helped exaggerate an already impressive bull market in equities, which topped out, at extraordinarily overvalued levels, in 2000.

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Bond yields have been extraordinarily low in the developed world in recent times because the economies have been stuck in, or very near, a liquidity trap.
Longer term government interest rates have remained positive, but at 1.9 per cent they were very close to the territory which Keynes warned about,
in which the future yield on the bonds did not compensate holders for the risk of capital loss if economic circumstances changed.
Gavyn Davies, FT, 18 March 2012

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To be able to borrow money at -2.0%/year real and invest it in useful things is a very, very good business to be in
Brad DeLong, 11 March 2012

The breakeven rate on Sweden’s 10-year inflation-linked bonds shows
investors expect annual inflation of 1.55 percent over the next decade

“When breakevens have been at these levels, traditionally it has been a buy,”
Bloomberg, Jan 23, 2012

Martin Tallroth, an interest rate strategist at Swedbank AB in Stockholm, said in an interview.
“Index-linked bonds look cheap relative to the nominal bonds.”

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How the west cut its debts
The crucial issue is that during that period, the state engineered a situation where the yields on government bonds were kept slightly below the prevailing rate of inflation for many years.
Gillian Tett, FT, December 22, 2011

What Reinhart and Sbrancia argue is that if you want to understand how the west cut its debts during the last great bout of deleveraging, namely after the second world war, then do not just focus on austerity or growth

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Riktiga karlar är inte rädda för lite inflation
Rolf Englund blog, 19 februari 2010

Next Bubble Is Forming: U.S. Government Bonds

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Skandias Realräntefond, sept 2011

Skandias Realräntefond har stigit med 7,5 procent i år
Mest av alla Skandias fonder, 9 augusti 2011

Se fondfakta här

Skandia, se Realräntefond

Pimco November 2010

NS&I pulls inflation-linked savings certificates
More than 500,000 savers have bought NS&I index-linked savings certificates to beat low interest rates and rising inflation.
DT 7 September 2011

The announcement is the latest blow to savers who have seen their income plummet at a time when most savings accounts fail to offer any real rate of return once inflation and tax are taken into account.

NS&I is tasked with raising a fixed amount for the Government coffers each year

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There is no other investment which guarantees an annual return of RPI inflation plus 0.5% tax free over the coming five years, so the return of inflation proof bonds will be welcomed by many

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According to the Treasury’s website, the effective yield (not counting the inflation adjustment) was MINUS 0.825 %,
(-0.825%) not 0.825%.
Investors are so desperate for inflation protection, they’re will to PAY nearly an extra percent over par UP FRONT to buy it.
Wall Street Journal 18 Augusti 2011

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Inflation har historiskt varit ett sätt att minska tunga skuldbördor.
Metoden kan bli aktuell igen som ett sätt att bekämpa skuldkrisen. Storbritannien har redan börjat.
Viktor Munkhammar, DI 2 okt 2011

Sverige och många andra länder hade periodvis tvåsiffriga inflationstal och negativa realräntor under 1970- och 1980-talen. Den höga och ojämna prisökningstakten hade många nackdelar. Men för dem med stora skulder fanns en stor fördel: Inflationen minskade snabbt skuldbördan.

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För att räkna ut den verkliga avkastning som tillexempel en köpare av statsobligationer får på sina utlånade pengar brukar man tala om realränta, det vill säga räntan justerad för inflation.
I USA är den ettåriga realräntan idag minus 3 procent, i Storbritannien minus 4 procent, i Tyskland minus 1 procent.
Även i Sverige är realräntan negativ
Andreas Cervenka, SvD Näringsliv 20 maj 2011

Förlorare på denna makroekonomiska motsvarighet till skimming är framförallt pensionärer, som via olika fonder är stora investerare i statsobligationer. Men också sparare med pengar på vanliga bankkonton kan känna sig blåsta. För ett land som kämpar för att bli av med stora skulder är minusräntor däremot rena rama mirakelkuren. Och den har använts förr, med framgång

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Cui bono? The banks, of course

På sikt hotar en ny världsomspännande inflationsvåg, skriver han.
Om boken Peer Steinbrück, tidigare Tysklands finansminister, Unterm Strich
Rolf Gustavsson, SvD 6 november 2010

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Kritiken mot Handelsbanken Liv har uppstått mot bakgrund av en generell kris bland livbolagen, som är hårt ansatta av rådande marknadsförhållanden.
Under många år har bankens försäkringskunder garanterats räntor på mellan 3 och 5 procent, vilket bolaget inte kan leverera med dagens marknadsräntor.
Att skriva på det här sättet, utan att lyfta fram att kunderna trots dagens finansiella klimat sitter med garanterade räntor på upp till 5 procent, är helt groteskt
SvD Näringsliv, 7 december 2012

– Det värsta är att man lyfter kunderna ur traditionella försäkringar där banken har hög risk och liten lönsamhet, och in i fondförsäkringar där banken har låg risk och hög intjäning. Det är win-win för banken, och lose-lose för kunden, fortsätter Magnus Gewert.

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Rekordlåga räntor under lång tid betyder lägre pension. Samtidigt har många pensionsbolag utlovat en viss garanterad återbäringsränta.
I Sverige finns enligt Finansinspektionen 1 900 miljarder kronor placerade hos livförsäkringsbolag och i pensionskassor.
1 300 miljarder av dessa är kopplade till en garanterad ränta på i genomsnitt 3,5 procent. Består lågräntevärlden kan vissa, framförallt mindre bolag, få svårt att uppfylla sina åtaganden enligt FI.
Andreas Cervenka, e24 13/2 2011

Det är inte bara livbolagen som har problem med sina pensionslöften. Det tickar även en pensionsbomb i börsbolagen.
Det handlar om miljardbelopp som företagen inom drygt ett år måste täcka med eget kapital.
Patricia Hedelius, SvD Näringsliv 30 september 2011

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Kenneth Rogoff, former chief economist of the International Monetary Fund and now a professor at Harvard University,
Given the low growth, he says, inflation above central banks’ targets could be helpful:

“A bit of inflation is by far the lesser evil compared with even lower growth.
Five per cent inflation for 2 to 3 years is not the end of the world. There are even some benefits.”
Financial Times 13 may 2011

Measuring Inflation
Inflation, a rise in the general level of prices caused by excessive money creation, is not an easy thing to measure.
Prices for individual items fluctuate constantly for reasons that have nothing to do with inflation, and
an accurate measure of inflation must distinguish between these relative price movements and inflation.

The Federal Reserve Bank of Cleveland

"I don't know who's buying 30-year fixed debt.
I don't understand TIPS (Treasury Inflation Protected Securities) that are projecting 30 years of benign inflation,"
Ray Dalio, founder & CIO of the hedge fund Bridgewater Associates, 3 Mar 2011

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"When you get to China with a 5 percent rate and a 15 percent nominal growth rate, it's a no brainer," he said.
"You don't want to lend; you want to borrow. And that creates a fuel in a bubble."

Bridgewater Associates is the world's largest hedge fund, with $8.9 billion under management.
It has returned more to its investors than Google, Amazon, Yahoo and eBay combined.

Read more here

Next Bubble Is Forming: U.S. Government Bonds

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Today’s rock-bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset-based economy that promotes unsustainable wealth creation and a false confidence in perpetual capital gains.
Bill Gross, Pimco, February 2011

Investors accepted a yield of minus 0.55 per cent on $10bn of Treasury Inflation Protected Securities
– or Tips – which compensate holders if the consumer price index rises.
Financial Times 26/10 2010

Expectations for inflation over the next five years – based on comparing Treasury yields and those for Tips – have risen as high as 1.75 per cent this month, up from 1.13 per cent in August

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Skandia, se Realräntefond

TIPs are the best
Posted by Izabella Kaminska on Aug 13 18:18. on FT Alphaville
There’s been lots of pondering about the negative five-year Treasury inflation-protected (Tips) rate,
but here’s one explanation that strikes us as extremely sensible.Tips are the best.
In the event of deflation, they perform just as well as conventional bonds because it’s not their coupons that are adjusted for inflation but their principals.

Full text of Kaminska

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Ten-year Treasury yields fell this month to their lowest levels since the dark days of January 2009.
TIPS are at similarly historical levels, lowest since the government started selling them in 1997.
A low yield means demand is high for TIPS, which offer investors additional annual returns to make up for the rate of inflation.
The gap, or breakeven, between the two yields implies what investors expect inflation to be.
WSJ 25/10 2010

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Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Raghuram G. Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department.
After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says.
Bloomberg 23 August 2010

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The real interest rate on 5-year inflation-protected securities is now negative.
In other words, prospects for other investments are so poor that some investors prefer a safe asset that doesn’t quite keep up with inflation.
The invisible bond vigilantes continue their invisible attack: nominal 10-year bonds at 2.71%.
Paul Krugman 11 August 2010

The British government has just stopped the sale of index-linked national savings certificates.
These paid the rate of inflation plus 1% for five years, with returns being tax-free.
Buttonwood, The Economist July 20th 2010

Over the long run, a government should leap at the chance to fund itself at 1% real; that ought to be less than Britain's GDP growth rate.

A cynic would look at the decision and say "Aha! The government either believes that inflation will stay high, or is pursuing a deliberate policy of inflating away its debt. It would rather issue bonds at a nominal 3% fixed than pay 1% real."

A 1% real return is not generous historically. Savers should get some real after-tax return or why would they save?

(Buttonwood should declare an interest; I am such a saver. But the change does not affect the value of my existing portfolio, only stops me from buying more.)

The certificates look so good in relative terms because the government/Bank of England are punishing savers with low rates, high inflation and high taxes.

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Savings products linked to the inflation rate have been withdrawn from the market by National Savings and Investments after proving too popular.
BBC 19 July 2010

Index-linked savings certificates were withdrawn from sale by NS&I at the start of the day because sales "far exceeded" the level anticipated.

Some savers have been attracted to products with interest linked to inflation because other rates are low.

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Arun Motianey, author of the book "SuperCycles" and director Roubini's:
The global economy is entering a next "supercycle" phase
that will generate inflation necessary for recovery

CNBC 10 Mar 2010

"It's going to be inflation everywhere and it's going to happen really through the weakness of the US dollar," he said.

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Jag har länge propagerat för realräntepapper - i USA benämnda TIPS - och de senaste tre åren tycks det ha varit en god placering.

Inflation Adjusted S&P500 June 2, 2010, Tim Iacono

Even long-term rates are low — the real interest rate on
10-year bonds is below 1.5 percent.

Paul Krugman NYT March 5, 2010

Suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected;
servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending.
Why should that be intolerable?

So what’s the problem? Confidence.

If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.

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What we’re doing now is moving in the wrong direction,
with real interest rates rising even as the nominal rate remains at zero.

Paul Krugman February 19, 2010

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Larry Summers, Paul Krugman, Gavyn Davies
Utan bubblor kollapsar ekonomin
Andreas Cervenka, SvD Näringsliv 19 november 2013

I anledning av Summers
Det kanske är så att utan bubblor och snabb kreditexpansion skulle vi inte haft de tillväxttal vi kommit att vänja oss vid.
Det tycks finnas en underliggande och långsiktig stagnation som dolts av excesserna de senaste två decennierna.
Peter Wolodarski, DN, 1 december 2013

Allt detta talar för att de flesta västländer kan ha gått in i en ny fas av ”sekulär stagnation”; ett fenomen som ekonomer oroade sig för på 1930-talet.

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Peter Wolodarski

"We should not dismiss the possibility, raised by Larry Summers
that we may need negative real rates for a long time"

I interpret this as IMF chief economist Olivier Blanchard saying,
as clearly and straightforwardly as his office allows him to,
that in his judgment the 2% per year inflation target is past its sell-by date and rotted,
and that the North Atlantic economies need to move to a 4% per year inflation target
in order to reduce the risk of another 1932, or another 2010.
Brad DeLong, November 20, 2013

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Harvard economist Larry Summers created a stir earlier this month when he suggested that
the world economy may be entering a period of “secular stagnation,”
where aggregate demand fails to recover and sustain growth on anything like the pre-crisis trajectory.
Darrell Delamaide, MarketWatch, 20 November 2013

Did inflation targeting fail?
Central banks have mostly escaped blame for the crisis.
How can it have gone so wrong?
Martin Wolf, Financial Times, May 5, 2009

The orthodoxy on inflation is certainly shifting.
The best policy may well be to talk tough about inflation while keeping interest rates low for as long as possible.
The Economist print March 11th 2010

The anxiety about indebtedness makes inflation seem all the more appealing. Spending in rich countries, such as America and Britain, will flounder as long as households look to pay down the debts they acquired to buy expensive homes.

A burst of unanticipated inflation that was not expected to last would be a salve to the most troubled rich economies, but it is not something that can be easily engineered. Even so, how much regret would even the most hawkish central banker feel if inflation rose above 2% for a while without making bond investors nervous?

The best policy may well be to talk tough about inflation while keeping interest rates low for as long as possible.

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It’s all been a polite, rather academic discussion so far,
which is odd given that commodities are rampant, asset prices are bubbling, and inflation targets about to be or already breached in Asia and the UK.
Perhaps, behind the scenes, a change of heart among central bankers has already happened.
FT Lex March 19 2010

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Olivier Blanchard, the IMF’s chief economist called for several bold innovations.
Central banks should raise their inflation targets—perhaps to 4% from the standard 2% or so.
The Economist print Feb 18th 2010

The logic is seductive.
Because inflation and interest rates were low when the crisis hit, central banks had little room to cut rates to cushion the economic blow.

Once their policy rates were down to almost zero, the world’s big central banks had to turn to untested tools, such as quantitative easing. Politicians had to boost enfeebled monetary policy by loosening their budgets generously.

Had inflation and interest rates been higher, policymakers would have had more room to cut rates. That gain, Mr Blanchard argues, might outweigh the small distortions from modestly higher inflation, especially if countries reformed their tax systems to make them inflation-neutral.

Mr Blanchard might be wrong. He may be understating the costs of higher inflation.

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Comment by Rolf Englund:
Yes, he might. But he is after all the IMF’s chief economist.....

Was inflation sown in The Great Moderation?

Riktiga karlar är inte rädda för lite inflation
Rolf Englund blog 19/2 2010

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The Case For Higher Inflation
Olivier Blanchard, currently the chief economist at the IMF,
conclusion, central banks have been setting their inflation targets too low
I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree.
Paul Krugman, Febr 13 2010

there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts.

Or to put it a bit differently, the long-run Phillips curve isn’t vertical at very low inflation rates.

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The main argument for a higher inflation target was put forward by Olivier Blanchard and his colleagues in 2010:
a higher inflation target makes it easier to cut real (inflation-adjusted) rates deeper still should the economy require it.

Since then, a higher inflation target has won steadily more adherents.
Martin Sandbu, FT 4 January 2017

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Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road?
The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so.

Chairman Ben S. Bernanke At the Economic Club of Washington D.C., Washington D.C. December 7, 2009

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The gap between yields on Treasuries and so-called TIPS due in 10 years closed above 2.25 percentage points last week, the longest stretch since August 2008.
That’s the low end of the range in the five years before Lehman Brothers collapsed,
and shows traders expect inflation, not deflation in coming months

Bloomberg Dec. 21 2009

Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week.

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Judged by the “breakeven” rate between inflation-protected and other Treasury bonds,
financial markets’ estimates of long-term inflation have jumped of late, although consumers’ expectations have remained stable
The Economist print 12/11 2009

Inflation Tips
Worries about the size of America’s budget deficit and fears about the potential politicisation of the Federal Reserve are rising.
There is a danger that higher headline inflation will be misread, even as rising energy costs sap demand.
The Economist print 12/11 2009

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The market for Treasury Inflation Protected Securities shows traders expect inflation over the next 10 years to average 1.96 percent,
which is 0.74 percentage points less than the past decade’s average
Bloomberg, August 11 0009

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The U.S. Treasury Department plans to ramp up sales of inflation-protected bonds
China, the largest holder of U.S. government debt, is among investors that have indicated they want to buy more of the securities
Also: Link to nice slideshow about the Biggest Holders of US Gov't Debt, such as Luxembourg, Russia, Brazil, Caribbean Banking Centers (Bahamas, Bermuda, the Cayman Islands, Netherlands Antilles, Panama and the British Virgin Islands), Oil Exporters, Japan, China (Mainland)and Federal Reserve and US Intragovernmental Holdings (That’s right, the biggest holder of US government debt is the United States itself. The Federal Reserve system of banks and other US intragovernmental holdings account for a stunning $4.806 trillion in US Treasury debt.
CNBC/Reuters 5 Aug 2009

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Slide show

US Dollar


China’s central bank warned that its counterparts in developed nations face difficult choices
as monetary easing threatens to cause “severe” inflation and exchange-rate volatility.
“Failure to manage the degree of easing may lead to concerns about mid- and long-term inflation and exchange-rate stability,”
the People’s Bank of China said in a quarterly monetary policy report, posted on its Web site today.
Bloomberg August 5 2009

China, the owner of $801.5 billion of Treasuries, pressed the U.S. at a summit in Washington last month for economic polices to protect the dollar’s value.

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Is the US (and a number of other high-income countries) on the road to fiscal Armageddon?
Are recent jumps in government bond rates proof that investors are worried about fiscal prospects?
Martin Wolf, Financial Times June 2 2009

Alan Greenspan's tragic mistake
negative real interest rates from 2002 into 2005
It was a painful spectacle to watch.
Wall Street Journal, editorial, October 24, 2008

The original bubble was in housing prices and mortgage-related assets,
which the Federal Reserve helped to create with its negative real interest rates from 2002 into 2005.

This was Alan Greenspan's tragic mistake, not that the former Fed chief will acknowledge it.

Read more here

Bond Bubble Trouble?
If you have not yet read about the ominous U.S. Treasury bubble (which has been around for awhile),
here is recent a recap:
Brady Willett January 15, 2009

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I'd say you got to buy TIPS.
You want inflation protection, and the value of TIPS is near historic
Bill Gross Forbes 6/1 1009

TIPS or inflation-protected securities can benefit
2½% real yields cannot possibly be maintained unless deflation as opposed to inflation becomes the odds-on favourite.
What bond investors know as “breakeven inflation rates” are currently signaling a future where the US CPI averages -1% for the next 10 years.
Possible, but not likely.
Bill Gross January 2009

What I hear more and more, both from bankers and from economists, is that the only way to end our financial crisis is through inflation.
Their argument is that high inflation would reduce the real level of debt, allowing indebted households and banks to deleverage faster and with less pain.
The advocates of such a strategy are not marginal and cranky academics. They include some of the most influential US economists.
Wolfgang Münchau, Financial Times, May 24 2009


/Nominal/ rates on three-month bills turned negative on Dec. 9 for the first time.
The same day, the U.S. sold $30 billion of four-week bills at a /nominal/ zero percent rate.
Bloomberg Dec. 15 2008

Jean-Claude Trichet, president of the European Central Bank, this week gave warning about the mistakes of the 1970s, when inflation was let loose at huge cost to growth.
the average world real interest rate is negative.
The Economist print May 22nd 2008

Why Greenspan does not bear most of the blame
The US is in no way exceptional for the level of residential investment.
Somewhat to my surprise, the share of residential investment in UK gross domestic product has been much the same as in the US.
very low long-term real interest rates
Martin Wolf FT April 8 2008


Yields on five-year Treasury Inflation-Protected Securities fell below zero
on speculation that inflation will quicken as the U.S. economy slows.
Yields on the securities, known as TIPS, dropped to minus 0.036 percent
nakedcapitalism March 4, 2008

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Soaring commodity prices, rising headline inflation and weakening economic growth: for those whose memories stretch back to the 1970s, this combination brings painful memories. It reminds them of the mistakes made by the central banks that accommodated the upsurge in inflationary expectations rather than contained them. Inflation was finally brought back under control in the early 1980s. But the costs of letting it escape were huge.
Could we be making the same mistakes again?
Martin Wolf, FT March 4 2008

As Richard Fisher, president of the Federal Reserve Bank of Dallas noted in a speech delivered in London on Tuesday: “Since the January federal open market committee meeting, longer-term rates, including those on fixed mortgages, have risen rather than followed the federal fund rates downward.” In such circumstances, aggressive monetary policy may have weak, even perverse, effects on the real economy.

In the US today, inflation expectations are on a knife edge. As I noted last week, the expectations shown in the relation between inflation-indexed treasuries (TIPS) and conventional bonds appear to be quite well contained. But the Cleveland Fed offers a “liquidity adjusted series”, which allows for the desire to hold more liquid assets in a period of financial stress. On this measure, expected inflation is soaring (see chart). The Fed’s position is now uncomfortable. The assumption that it can cut rates without fear of the consequences is wrong.

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As of this writing the annual earnings yield on the value-weighted S&P composite index is 5.53%. This is a wedge of 3.22% per year when compared to
the annual yield on 10-year Treasury inflation-protected bonds of 2.31%.
Bradford DeLong February 28, 2008

Who gives a damn about inflation?
Now that the age of moderation has ended, we are returning to Phillips curve-type discussion.
rising inflation is the most painless way out of a debt crisis
Wolfgang Münchau blog 31.01.2008

Krugman on monetary transmission channels
My guess remains that the US and UK will try to inflate themselves out of their troubles.
Wolfgang Munchau (Portal)

I think the really interesting question to be asked to which extent central banks have contributed to, or even caused, this crisis.
This is not about Mr Greenspan, or a single monetary policy decision at a particular time, or whether US interest rates were raised too late in the last cycle.
This question relates to the longer-term impact of monetary policy during the age of global disinflation,
which started in the early 1990s, and which has just ended.

The ECB, the Fed, and the Credit Crisis, Wolfgang Münchau. 07.11.2007


Riksgälden om realt sparande

Info about something called
The US Real Term Structure of Interest Rates with Implicit Inflation Premium


The US economy is leading the way, having already entered a stagflationary phase.
Such an environment is poisonous for financial assets.

During such periods, investors are best served keeping most of their allocations in cash and inflation-linked securities.
Tim Bond, head of asset allocation for Barclays Capital 6/12 2007

How did we get here?
To make a long story short: The process was started by money printing in America to bail out the last bubble.
Bill Fleckenstein, CNBC 4/6 2007

That induced money printing in much of the world because so many countries had linked their currencies to the dollar. More importantly, the very regions that were primed to grow -- think Asia, India and the Middle East -- exploded, in no small part, thanks to money printing. Thus, America's housing boom kept our economy growing. Growth in the other parts of the world I just mentioned, together with the attendant commodities boom, conspired to create the worldwide growth (and inflation) that we have experienced.

A lot of what's transpired has been a function of absurdly low interest rates, given the level of inflation around the world, and the collapse in risk premiums, aided by ratings-agency alchemy, which has allowed debt -- from moderately risky to total garbage -- to be spun into high-quality credit structures. In other words, the debt markets have acted as unindicted co-conspirators in the frenzy.

Bostadspriserna är högre än vad som är långsiktigt fundamentalt motiverat och kommer därför att falla.
Enligt BKN:s bedömning är felprissättningen på småhus ca 20 procent.
Bostadspriserna kan falla än mer, om dagens låga realränta stiger.
Statens Bostadskreditnämnd, 28/11 2008


Pengarna är för billiga
Gunnar Örn, DI 2007-05-29

Bland dem som hyllar marknadsekonomi och fri prisbildning har det konstigt nog blivit högsta visdom att det viktigaste priset av alla inte ska sättas ute på marknaden, utan av politiker och byråkrater. I dag är det världens centralbanker som har det avgörande inflytandet över hur högt priset på pengar ska vara. Något som förklarar marknadens extrema fokusering på uttalanden av centralbankschefer som Ben Bernanke i USA, Jean-Claude Trichet i eurozonen, Toshihiko Fukui i Japan, Mervyn King i Storbritannien och Stefan Ingves i Sverige.

Varför är räntan i dag bara hälften så hög som den var på toppen av den förra högkonjunkturen?
Senast var det den västliga samarbetsorganisationen OECD som ställde frågan.

"Realräntorna är ovanligt låga för att vara i det här skedet av konjunkturcykeln", konstaterar OECD-ekonomerna i sin senaste översikt av världens finansmarknader.

"Det öppnar enorma arbitragemöjligheter att låna till låg ränta och köpa tillgångar som ger högre avkastning."

Enligt OECD har vi alltså en fortsatt börsuppgång framför oss. Risken är bara att företagen hinner skuldsätta sig för mycket under resans gång, något som ökar riskerna för framtida krascher.

Den reala räntan går att mäta i priserna på så kallade realobligationer, alltså skuldsedlar som ger en garanterad ränta ovanpå inflationen. Då kan man se att den är mindre än hälften så hög som i förra högkonjunkturen.

I Sverige låg den reala räntan över 4 procent när it-boomen var som värst. I dag är realräntan mindre än 2 procent.

OECD skyller de konstlat låga obligationsräntorna på Kina och andra asiatiska länder. Världen badar i likviditet som en följd av att dessa länder försöker fixera priset på pengar, menar organisationen.
En gyllene regel i ekonomisk teori är att den reala räntan på lång sikt ska vara lika hög som den reala tillväxten i ekonomin.

I USA har realräntan fallit från 4,7 procent i slutet av 1990-talet till 2,7 procent under första kvartalet i år.


A slump was averted partly by very low world long-term real interest rates and partly by the “dissaving” of the US, the UK and other English-speaking countries.
The burden of supporting the world economy can hardly rest indefinitely on the shoulders of Anglo-American shoppers and home owners.
Samuel Brittan 11/5 2007

I believe US stocks are now very attractive for investors.
5 per cent real return on stocks still yields a 3 per cent premium over inflation-indexed bonds
Jeremy Siegel, FT, 26/4 2007

Kudlow doomster???
Caveat Emptor
by Lawrence Kudlow

Inflation-linked bond spreads have been widening, another excess-money signal.
I don’t want to take the inflation threat too far, but...
Kudlow's Money Politic$, 23/3 2007

The world short term real interest rate is slightly above 2%.
David R. Kotok at John Mauldin 22/1 2007
Highly recommended


See also: The Next Bubble - House prices

Over the long-run, the “neutral” stance of monetary policy (also known as the equilibrium real federal funds rate) should be closely related to the potential growth rate of GDP.
Chart 2 shows that the historical “spread” between the real federal funds rate and real GDP growth has been systematically mean reverting.
Paul McCulley and Saumil Parikh, November 2006

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This excess of savings over investment in the rest of the world is not the result of high US or global real interest rates. On the contrary, real interest rates are astonishingly low.
Martin Wolf, Financial Times September 27 2006

In a few years, the low bond yields of recent years will look like an anomaly rather than the norm.
Globalisation is more likely to push real interest rates and inflation higher than lower in the next few years.
Joachim Fels, FT, 21/9 2006
The writer is managing director and chief global fixed income economist at Morgan Stanley

Yes, long-term interest rates have been exceptionally low in recent years. Yet this is unlikely to have been caused by a savings glut, but rather by a global liquidity glut that is now receding.

A better explanation for depressed long-term interest rates is that central banks cut short-term interest rates to extremely low levels during the equity bear market of 2000-2003 and the following deflation scare and thus flooded the financial system with excess liquidity.

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Alan Greenspan

B.S. Bernanke


So why hasn’t IT happened yet?
Thus far the Fed has succeeded in playing Fire Chief and kept pouring liquidity into the system. But the Fed CAN NOT keep the money and credit spigots wide open indefinitely:
All they are doing is delaying the inevitable, not curing it.
Aubie Baltin 20/9 2006

Real interest rates in the past few years have remained lower for longer than at any other time during the past half-century.
Despite recent tightening by central banks, average real short-term rates and bond yields in the developed economies are still well below normal levels. Most commentators have concluded that a new era of cheaper money has arrived.
The Economist print edition 14/9 2006

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As Lawrence Summers, former US Treasury secretary, noted in a recent lecture on India: “There is one striking fact about the global economy that belies a predominantly American explanation for the pattern of global capital flows: real interest rates globally are low, not high.

Why should we remain concerned about global imbalances? The answer is that they are undesirable, cannot continue indefinitely and the longer they last, the bigger and more painful the adjustment will be.
What is undesirable ought to change. What is unsustainable will change. What is dangerous must change.
Yet, if the world is to avoid a serious recession, adjustment must start in the surplus countries.

Martin Wolf, Financial Times 29/3 2006


Inflation-protected bonds, or TIPS, seem like the perfect hedge against rising prices
A securities vehicle with a guaranteed face value and protection against inflation. That's an appealing combination for fixed income investors facing an inflationary environment.
Marc Gerstein, Director of investment research, Reuters.com, 30/5 2006

Assume the CPI-U rises 1% in the first six months after issuance of a TIPS with a 2.75% coupon. At that time, the face value of the security will have been adjusted up to $1,010 and the first semi-annual interest payment will be $13.89 ($1,010 times 2.75%, divided by two to reflect interest for half a year).

These escalations can add up nicely in a prolonged period of high inflation. At the end of the day, combining all the interest received with the higher maturity payoff produce an average annual percentage return of 2.75% plus the average annual inflation rate (a "real" return of 2.75% per year).

But there are several catches. The federal tax status of the interest payments is obvious.

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Once the 30-year bond is back it will almost certainly complete the inversion of the long end of the yield curve.
It means that the bond market appears to be betting on a recession.
Jennifer Hughes, Financial Times, 9/2 2006

Bond Market Bubble?
On Tuesday, January 18, the yield on fifty-year inflation-protected U.K. government bonds (what the British call “indexed-linked gilts”) dropped to 0.38 percent, about one-seventh the historical average of just over 2.6 percent for such debt instruments.
John H. Makin, January 31, 2006

A yield drop from 1 percent to 0.38 percent on a fifty-year bond corresponds to a 30 percent rise in its price over a period of just three months. That is an annual return of over 100 percent, much higher than the 13 percent annual increase in U.S. house prices at midyear and the 20 to 30 percent gains seen in the stock market before the March 2000 crash.

The asset bubble has spread to long-term government bonds, especially those with inflation protection. What is going on here?

The price that investors are willing to pay for long-term, riskless income streams has risen to unprecedented levels worldwide. More broadly, U.S. real ten-year yields are extraordinarily low by historical standards. Real yields on long-term bonds in Europe are even lower. These observations constitute the bond market “conundrum” referred to by Alan Greenspan and explained by incoming Federal Reserve chairman Ben Bernanke as the consequence of a global savings glut.

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Using data going back to 1870 economic historians have estimated the long-run real rate of interest, after allowing for inflation, to be about 3 per cent.
On Wednesday, fund managers were buying 50-year index-linked gilts on a real yield of less than half a per cent.
John Plender, Financial Times, January 20 2006

Given the tendency of markets to revert to the mean, a casual observer might conclude that the professionals have taken leave of their senses. In fact, the behaviour is rational.

The snag is that what is rational for the individual fund has irrational systemic consequences. Bubbles occur when asset prices lose touch with fundamental values. That is precisely what is happening in the UK index-linked gilts market. As more pension funds adopt liability matching, risk aversion reaches epic proportions and scarcity in the market causes prices to rocket.

Refinancing could prick the index-linked bubble, although it will take a long time before real yields revert to the mean. As for conventional bonds, the pussy cat bond market means that fund managers are placing monumental faith in the ability of central bankers to protect the value of money and preserve their independence from high spending governments.

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“it’s different this time”
Because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past.
PIMCO has for several years now focused on the real interest rate – Fed Funds minus inflation – as the most legitimate indicator of neutrality.
Bill Gross, November 2005

The Fed has been on a mission for 15 months now to return money market interest rates to neutral and to impart a semblance of normality to the cost of borrowing.

Historically trading between 2% and 3%, which would imply a 4½ - 5½% range in nominal headline terms, we have suggested it will be different this time. Because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past. An

With January 2007 TIPS trading at a real yield of 1%, the implied level for real Fed Funds over the next 14 months hovers close to our previous forecast.

Economists/investment managers are also aware of the potency of a flattening yield curve shown in Chart 1. By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle. Only Volcker with his need to strangle inflation out of the system persisted into negative yield curve territory for longer than a few months.

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From Goldilocks to stagflation.
Real bond yields are extremely low already, suggesting that bond markets are already factoring in a significant slowdown in economic growth. However, bond markets are not yet priced for a significant pick-up in consumer price inflation.
Joachim Fels, Morgan Stanley, 14/9 2005

If investors in index-linked bond market were genuinely that fearful about the future, current equity prices would be hard to justify.
Once the higher possibility of extreme events is included in a valuation model that balances the returns that investors require against the risks they are prepared to accept, Mr Miles found the current yields on index linked government bonds of below 2 per cent extremely difficult to justify.
Chris Giles, Economics Editor, Financial Times, 12/9 2005

“There is a disconnect between values in the bond and equity markets,” Mr Miles said, the normal distribution was “spectacularly hopeless” at accounting for the leaps and troughs in economic activity of 21 countries over the past 170 years.

The research is based on recent advances in valuation techniques, discovered by Professor Robert Barro of Harvard University. These stress the importance of including the possibility of extreme events in any valuation model for bonds and equities. Most extreme events are assumed to hit equities hard, but have little impact on safe government bonds. And history shows this is not just a theoretical nicety.
Wars, pandemics and revolutions have occurred much more often in the past than standard models, based on normal distributions or “bell curves”, suggest.

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In America's deregulated financial market environment, liquidity-related impacts show up less in the various gauges of the money supply and credit flows and more in the form of movements in real interest rates.
With the Fed maintaining a long period of unusually accommodative policy financial assets have been supported by a steady stream of "carry trades."
Stephen Roach, 5/9 2005

"Livbolagen går mot ljusare tider"
Det finns dock ett hot kvar mot några av de ekonomiskt svaga bolagen.
Det är den låga räntan. Låg ränta kan tvinga fram ytterligare en sänkning av den så kallade högsta ränta, en ränta som används för att beräkna värdet på försäkringsbolagens åtaganden gentemot spararna.
DN 4/9 2005

En sänkning betyder, enkelt uttryckt, att bolagens eget kapital minskar i värde. För en del bolag innebär det sannolikt krav på kapitaltillskott från ägarna.
Den sista september sänks räntan från 3,5 procent till 3,25 procent. Det räknar Finansinspektionen med att alla bolag klarar. Men om ytterligare sänkningar tvingas fram, kan de sämst ställda bolagen få problem.

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Bill Gross, July 2005:

4% real yield has been lowered to 1% real yield
with a resultant 14% price pop
Bill Gross, Pimco May 2005

Nouriel Roubini and David Backus Lectures in Macroeconomics
Chapter 5. Output and Real Interest Rates

If You search for real interest rates at Googles You find this page on their result page nr 2 (010914)

The New Era

Efter tre år med kraftig värdeökning är den kortsiktiga risken i realräntefonder hög. Men på lång sikt är risken fortfarande minimal.
En av förra årets fondvinnare är Skandia Realräntefond, som steg 14,7 procent under 2002. Insättningarna har varit stora och intresset har gjort att även Robur, SEB och Öhman har startat egna realräntefonder det senaste halvåret.
Jonas Lindmark Morningstar 5/22/2003

Privata Affärer om Skandia Realräntefond

Skandia om Skandia Realräntefond


The increasing attention paid to growing U.S. current account deficits has bred nightmare scenarios of a sharp decline in the foreign-exchange value of the dollar and rising U.S. interest rates.
Financial markets, by contrast, appear more sanguine. Inflation-indexed bonds in the U.S. are yielding only about 1.5% in real terms, and the IMF's estimate of the long-term world real interest rate is about 2%.
Glenn Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush,
Wall Street Journal, 23/6 2005

Strange things are happening in the world economy: falling interest rates on long-term ­securities, declining spreads between returns on safe and riskier assets, large fiscal deficits and huge global current account “imbalances” should not, in normal circumstances, coincide. So what is going on?
The answer, in a nutshell, is a global excess of desired savings against the background of weak investment, low ­inflation and ever more integrated economies.
To understand the present we need to go back to the 1930s. The “paradox of thrift” was the most counterintuitive and, to the classically trained ­economist, morally, theoretically and practically objectionable idea in John Maynard Keynes’ General Theory of Employment, Interest and Money, published in 1936, in response to the Great Depression.
Martin Wolf Financial Times June 13 2005

Häromveckan sålde en polare till mig en etta på 26 kvadratmeter på första våningen för 1,1 miljon kronor.
Alla varningslampor blinkar rött. Och vi borde ha lärt oss vid det här laget.
Vad sysslar vi med? Tror vi att det ska vara annorlunda den här gången? Barnfamiljer som sitter och tokbjuder över varandra och tjackar hus för 4,5 miljoner kronor som betingade ett pris av 1,5 miljoner för bara något år sedan.
Lena Sundström Metro 4/5 2005

Deflation is in the Cards. Yes Readers, that is correct.
The answer to the "Great Flation Question" is DEFLATION.
I am not going to wimp out and say "stagflation"
and rest assured it is not "inflation" which means that the "hyper-inflation" that many see coming is totally laughable.
Michael Shedlock 25/4 2005

Following the collapse of the Bretton Woods agreement in 1971 with Nixon closing the "gold convertibility window" coupled with huge output expansion in Japan, Japanese currency reserves increased 260% between 1985 an 1988. Those dollars triggered a lending boom in Japan as well as incredible property bubbles and stock market bubbles. In 1989 the Nikkei index peaked above 38,000. Just as in the US in the late 1920's, earnings could not keep pace with market valuations and share prices started plunging. Japan repeatedly tried to stabilize the markets with injections of liquidity but Japanese property values plunged for 18 consecutive years and are still falling at the time of this writing.

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The market does not know whether it should worry about growth or inflation, or possibly both: "stagflation".
The short answer is that growth has hit a soft patch, and inflationary pressures are increasing, but talk of stagflation is needlessly alarmist
Financial Times editorial 23/4 2005

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What seems clear is that there are three main schools of thought
Philip Coggan FT 22/4 2005

The optimists believe the world has entered a new phase in which economies can grow rapidly without the inflationary pressures seen in the past.
In the late 1990s, they attributed this improvement to technological change; more recently, they have cited the influence of China and India, which are boosting global output while restraining labour costs.

The pessimists argue the boom is really down to the abundance of cheap credit.
Central banks reacted to the collapse of the dotcom bubble by slashing interest rates. This has kept consumption going by creating a bubble in housing but eventually, this excess credit will lead to disaster.
But here the pessimists are split. Some see the inevitable result as higher inflation; others as a deflationary bust.

One popular explanation for low bond yields is that Asian central banks are using their foreign exchange reserves to buy bonds as a means of preventing their currencies from rising against the dollar. They are uninterested in the price they pay; that is pushing yields down.

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Richard Clarida in Wall Street Journal
Alan Greenspan stirred up the bond market by opining that the then-low level of bond yields -- in tandem with strong growth, $50 oil
and a succession of Fed rate hikes since June -- represented a "conundrum."

From the TIPS market, we learn that the expected real return over the next 10 years on a riskless investment in government bonds is 1.81%.
11/4 2005

From January 1980 to January 2005, M3 US grew 420%.
Dow Jones Industrial Average returned 1,098%
Jim Jubak CNBC 1/4 2005

From January 1980 to January 2005, M1, the Federal Reserve's most conservative measure of the money supply in the United States, grew by 252%. M3, a measure that captures some of the money created by Wall Street's institutions, grew 420%.
At the same time as the money supply was growing, the cost of tapping into that river of cash was falling: The Fed funds rate, the cost for a bank to borrow overnight from the Federal Reserve, fell from 13.8% in January 1980 to 1% in January 2004.

No wonder that with money so easy to borrow (thanks to that jump in supply) and so cheap (thanks to low interest rates) that the price of assets such as stocks and bonds that you could buy with borrowed money soared.
From January 1980 to January 2005, the Dow Jones Industrial Average returned 1,098% and the Nasdaq Composite Index returned 1,175%.

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Doom on Wall Street (chart Dow 1972-1997) Note 1974-1975

Chart Dow 1994-2004

Chart Nasdaq 1994-2004

”Den enda period sedan 1700 då vår uppskattade realränta varit så här låg var åren under och närmast efter andra världskriget
Den genomsnittliga realräntan har varit 3 procent under tre århundraden.
Gunnar Örn, DI 30/3 2005

Morgan Stanley konstaterar att priserna stigit med genomsnitt 1,6 procent per år sedan år 1700. Samtidigt har den genomsnittliga, nominella räntan varit 4,6 procent.
Den genomsnittliga realräntan har alltså varit 3 procent under tre århundraden.
I dag är realräntorna betydligt lägre. En hel procentenhet under det långsiktiga genomsnittet. Morgan Stanley har utvecklat en egen modell för hur hög realräntan borde vara i dagens läge. Svaret är åtminstone 1 procentenhet högre.
”Den enda period sedan 1700 då vår uppskattade realränta varit så här låg var åren under och närmast efter andra världskriget”, heter det i analysen.

In an environment in which profits, business success, and jobs themselves have been driven in substantial part by a 20-year trend of lower interest rates, an observer must make the unmistakable conclusion that we have come to the end of the road.
Age does have some benefits if only in knowing what not to do if given a second chance.
PIMCO Founder and CIO Bill Gross addressed the graduating MBA class at Duke University's Fuqua School of Business on May 8, 2004.

A Guide to Global Inflation-Linked Bonds
a burgeoning global market that has more than tripled in size over the last six years, growing from $145 billion in 1997 to $551 billion at the end of 2003.
PIMCO January 2005

In 1981, the modern inflation-linked bond market began when the United Kingdom leveraged the strategy with a ?1 billion sale. Shortly thereafter, the trend caught on and Sweden, Canada and Australia also issued inflation-linked bonds. In 1997, the U.S. entered the market with its first auction of Treasury Inflation Indexed Securities, often referred to as "TIPS."

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The 10-year Treasury note yield jumped over 4.6%.
Between the Fed's announcement and the close, The Dow Jones industrials fell more than 138 points.
CNBC 22/3 2005

Financial markets were shaken by the inflation concern, despite a substantial drop in crude oil prices. Interest rates jumped, and stocks threw away a pre-announcement rally.
The Dow Jones industrials fell nearly 95 points on the day. Between the Fed's announcement and the close, the blue-chip average fell more than 138 points.

Essentially what we are saying is that all global asset prices markets will remain severely distorted as long as the main suppliers of excess savings to the world economy - the Japanese private investors - continue to live in a zero-rate environment.
If the Japanese economy regains momentum and the Nikkei manages to break through the 12,000 level. The bear market in global bonds would then resume in a big way.
Anatole Kaletsky at Investorsinsight 22/3 2005

As Keynes said, the market can remain irrational much longer than the rational investor can remain solvent.

Our first conclusion, therefore, is that the crash in bond markets which we expected to see on the basis of the past two economic cycles - 1994 and 1983/4 - will be slower and less disruptive than we thought. From a long-term perspective, however, a slow rise in bond yields is probably more ominous than a sharp bounce. Technically, bond yields are creating a huge multi-year base. In terms of economic fundamentals, the bond market's refusal to push long-term interest rates higher will offset the restrictive effects of monetary tightening. As a result, long-term inflationary pressures will intensify, fiscal disciplines on governments will be loosened and all asset prices will be pumped up.

Secondly, the present asset inflation - and rolling financial bubbles - will last for a surprisingly long time. If we are right about the dominant role of Japanese private savers among the zombie bond investors, then global liquidity and asset prices will depend less on US monetary policy or the strength of the dollar, than the level of interest rates in Japan. Given the likelihood that Japanese short rates will remain at or near zero for the next two years - and probably until the end of the decade (see Anatole's Notes from his Japan Trip) - this means US and euro rates long rates will remain "unnaturally" low for a very long time, regardless of what the Fed may do (or say). If this turns out to be true, then the implications for global economic conditions and for equity, property and other asset prices, should be extremely bullish.

If Japanese investors rediscovered their domestic equity market, they might stop their zombie bond-buying and conditions in the world financial markets would be transformed.

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US, Germany, France and UK face junk debt status
Rapidly rising pension and healthcare spending
Financial Times 21/3 2005

Rapidly rising pension and healthcare spending will reduce the debt status of the world's richest industrialised countries to junk within 30 years unless their governments move quickly to balance budgets and reduce outgoings, a report published on Monday warns.

Standard & Poor's, the credit ratings agency, says if fiscal trends prevail, the cost of ageing populations will fuel downgrades of France, the US, Germany and the UK from investment grade to speculative, or junk, category France by the early 2020s, the US and Germany before 2030 and the UK before 2035.

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Margit Gennser om ATP


56 private economists surveyed by the Wall Street Journal Online this month see another force at work:
expectations for low inflation.

Alan Greenspan called it a "conundrum": Long-term interest rates have remained low despite the Federal Reserve's campaign to raise rates on the short end.
Wall Street Journal 10/3 2005

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The Mystery of Low Interest Rates
U.S. Federal Reserve Chairman Alan Greenspan recently called the declines a "conundrum."
By ROBERT J. SAMUELSON The Washington Post March 7, 2005

Theories abound to explain the mystery. Here are three, courtesy of economist David Wyss of Standard & Poor's.

There are also gloomier theories.
Economist John Makin of the American Enterprise Institute says that low long-term rates signal fears of a weakening economy. A weaker economy would presumably mean less inflation and credit demand -- both justifying lower long-term rates.

Among worriers, the fear is that cheap credit has created a housing "bubble." In the year ending in September, average U.S. home prices rose 13%, reports one survey. In Nevada they rose 36%, in California, 27% and in Florida, 20%. Higher housing prices have supported consumer spending -- people borrowed against home values -- and free-spending Americans have bolstered the U.S. and global economies. If the cycle reversed, the consequences might be grim. Falling home prices. Sickly consumption. Global slump.

My view is that low interest rates are mainly a good sign. They reflect not only low inflation in the U.S. but growing confidence that it will stay low. We may be reverting to the 1950s, when this was the norm. In 1959 the rate on the 10-year Treasury bond averaged 4.33%.

This is a reassuring notion; it could also be wrong.

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Over the past couple of weeks, investors have been falling over themselves to snap up new offerings, whether they be long dated or short term, high yield or sovereign.
Beneficiaries of this feeding frenzy have included the French government, which became the first from the Group of Seven leading industrialised countries to issue a 50-year bond.
In what must count as a triumph of hope over experience for anyone with the slightest recollection of how inflation can suddenly take hold, it was priced to yield just 4.21 per cent a year.
Financial Times editorial 5/3 2005

In the US, Centex, a US housebuilder, sold $1bn of asset-backed paper and was rewarded with best ever prices. The tranche maturing after one year yielded a record low of seven basis points, or seven-hundredths of 1 per cent, over the one-month London Interbank Offered Rate (Libor).

The yield spread, or premium over government bonds, of emerging market debt has shrunk dramatically. That of many corporate bonds has fallen to levels last seen in 1998, just before the collapse of Long-Term Capital Management, a hedge fund, plunged the world into a big financial crisis.

It is difficult to explain the falling yields, which have brought real yields after adjustment for inflation to unusually low levels, by developments in the global economy. Despite high and recently rising oil prices, world economic activity is expanding at a reasonable pace.
It is little wonder that Alan Greenspan, Fed chairman, spoke last month of a bond market "conundrum". One could go further and argue that bond markets are falling prey to irrational exuberance similar to that seen in equity markets before the dotcom bust.

If so, one unpalatable conclusion is that we are living through a bond market bubble.

In today's market, the watchwords must be Caveat Investor.

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The idea that central banks should track asset prices is hardly new.
In 1911 Irving Fisher, an American economist, argued in a book, “The Purchasing Power of Money”, that policymakers should stabilise a broad price index which included shares, bonds and property as well as goods and services.
The Economist 24/2 2005

Det finns bara en stensäker placering: att köpa statens realränteobligationer.
Spararen kompenseras helt för inflationen och är garanterad en fast real ränta under spartiden.
I dagsläget får den som köper en 5-årig obligation 1,34 procent per år och 1,51 procent om pengarna binds i åtta år.
SvD 22/2 2005

Realränteobligationer har aldrig blivit någon succé bland hushållen. I fjol minskade rent av försäljningen, visar årsredovisningen från Riksgäldskontoret.

Hur hög är då denna neutrala "lagomränta" som Fed siktar på?
Där är osäkerheten desto större. Buden varierar från 3,0 till 5,0 procent. Och det är ett avsevärt spann. - Vi vet i dagsläget inte var den aktuella räntan ligger, förklarade Fedchefen Alan Greenspan nyligen. Banken får pröva sig fram.
Lars-Georg Bergkvist SvD Näringsliv 27/2 2005

Apropå Fed tar Föreningssparbankens chefsekonom Hubert Fromlet i en färsk analys upp förra veckans stora samtalsämne på Wall Street, som jag skrev om förra söndagen: Greenspans försäkringar om att det faktum att de långa marknadsräntorna fallit samtidigt som styrräntan höjts är en gåta ("conundrum") även för centralbanken. Greenspan står nog inte så frågande som han vill ge sken av. Han uttrycker sig medvetet dunkelt, menar Fromlet. Fed har ett ansvar även för långräntan, påminner han. I den lag som reglerar bankens ansvarsområde sägs att den skall agera för "maximal sysselsättning, stabila priser och måttliga (moderate) långräntor". Fed har dock själv bidragit till dagens situation på obligationsmarknaden. Genom sin extremt lätta penningpolitik har den blåst upp likviditeten i ekonomin. Det har bäddat för de låga långräntorna, och det är knappast något som Greenspan och hans kolleger vill bli påminda om - och ta ett delansvar för - vid "en eventuell framtida långränteuppgång av det otrevliga slaget", konstaterar Fromlet.

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Conundrum (gåta eller kvistig fråga, kinkigt problem enligt Norstedts engelsk-svenska ordbok) är onekligen "veckans ord" på Wall Street.
Som så ofta förr är det Fedchefen Alan Greenspan som lanserat det. Han har inte bara gjort sig känd som "alla tiders siffertuggare" som dagligen plöjer igenom enorma mängder ekonomisk statistik. Han gillar också att leka med orden. Vem minns inte hans varning 1996 för att börskurserna stigit i irrationellt övermått. Den här gången handlar det om den mystiska prissättningen på obligationsmarknaden.
Lars-Georg Bergkvist SvD Näringsliv 19/2 2005

Som så ofta förr är det Fedchefen Alan Greenspan som lanserat det. Han har inte bara gjort sig känd som "alla tiders siffertuggare" som dagligen plöjer igenom enorma mängder ekonomisk statistik. Han gillar också att leka med orden. Vem minns inte hans varning 1996 för att börskurserna stigit i irrationellt övermått. Den här gången handlar det om den mystiska prissättningen på obligationsmarknaden. Långräntorna har inte betett som de ska, enligt skolboken. Medan centralbanken höjt styrräntan sex gånger har marknadsräntorna sjunkit. Det brukar vara precis tvärtom

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Irrational Exuberance

Testimony of Chairman Alan Greenspan
We should be careful in endeavoring to account for the decline in long-term interest rates by adverting to technical factors in the United States alone because yields and risk spreads have narrowed globally.
February 16, 2005

Both realized and option-implied measures of uncertainty in equity and fixed-income markets have declined markedly over recent months to quite low levels. Credit spreads, read from corporate bond yields and credit default swap premiums, have continued to narrow amid widespread signs of an improvement in corporate credit quality, including notable drops in corporate bond defaults and debt ratings downgrades. Moreover, recent surveys suggest that bank lending officers have further eased standards and terms on business loans, and anecdotal reports suggest that securities dealers and other market-makers appear quite willing to commit capital in providing market liquidity.

In this environment, long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields. The simple mathematics of the yield curve governs the relationship between short- and long-term interest rates. Ten-year yields, for example, can be thought of as an average of ten consecutive one-year forward rates. A rise in the first-year forward rate, which correlates closely with the federal funds rate, would increase the yield on ten-year U.S. Treasury notes even if the more-distant forward rates remain unchanged. Historically, though, even these distant forward rates have tended to rise in association with monetary policy tightening.

In the current episode, however, the more-distant forward rates declined at the same time that short-term rates were rising. Indeed, the tenth-year tranche, which yielded 6-1/2 percent last June, is now at about 5-1/4 percent. During the same period, comparable real forward rates derived from quotes on Treasury inflation-indexed debt fell significantly as well, suggesting that only a portion of the decline in nominal forward rates in distant tranches is attributable to a drop in long-term inflation expectations.

Some analysts have worried that the dip in forward real interest rates since last June may indicate that market participants have marked down their view of economic growth going forward, perhaps because of the rise in oil prices. But this interpretation does not mesh seamlessly with the rise in stock prices and the narrowing of credit spreads observed over the same interval. Others have emphasized the subdued overall business demand for credit in the United States and the apparent eagerness of lenders, including foreign investors, to provide financing. In particular, heavy purchases of longer-term Treasury securities by foreign central banks have often been cited as a factor boosting bond prices and pulling down longer-term yields. Thirty-year fixed-rate mortgage rates have dropped to a level only a little higher than the record lows touched in 2003 and, as a consequence, the estimated average duration of outstanding mortgage-backed securities has shortened appreciably over recent months. Attempts by mortgage investors to offset this decline in duration by purchasing longer-term securities may be yet another contributor to the recent downward pressure on longer-term yields.

But we should be careful in endeavoring to account for the decline in long-term interest rates by adverting to technical factors in the United States alone because yields and risk spreads have narrowed globally. The German ten-year Bund rate, for example, has declined from 4-1/4 percent last June to current levels of 3-1/2 percent. And spreads of yields on bonds issued by emerging-market nations over U.S. Treasury yields have declined to very low levels.

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No Problem
Pessimistic pundits emphasize the dangers lurking in unsustainable trade and payment imbalances, excessive liquidity, savings shortfalls, dollar overhangs and global reflation
Money also talks, however, and its message has failed to echo the pundits' pessimism. After all, the yield on 10-year U.S. Treasury securities -- the world's most actively traded security -- is not far from 4%, near 40-year lows.
JOHN LIPSKY and JAMES E. GLASSMAN Wall Street Journal February 16, 2005

Worrisome explanations are offered for the bond market's stubborn equanimity. Asian central banks, hedge funds, carry trades and mortgage-market shenanigans all have been proffered as evidence that low bond yields camouflage future travails. Inevitably, skeptics conjure up the specter of asset "bubbles." Can bond markets be aping 1999-2000, when the Nasdaq was stepping up to a spectacular swan dive?

Perhaps current low bond yields don't require such complicated and conspiratorial explanations. After all, Treasury bond yields, more than anything else, reflect the outlook for inflation. Strikingly, Federal Reserve officials by 2003 began describing the U.S. economy as operating within a "zone of price stability."

Contrary to the analysts' consensus, it isn't hard to justify optimism about sustained low inflation

With core inflation anchored below 2%, with economic growth solid, and with the Fed-funds rate headed toward neutrality, investors' optimistic suspicions about favorable financial market trends are more likely to prove correct than are the downbeat warnings of the consensus.

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Inflation is Always and Everywhere a Monetary Phenomenon
It all started back in the late-1970s, when then Fed Chairman Paul Volcker severely curtailed money supply growth in an effort to check the uptrend in an inflationary cycle that was spiraling out of control. The product of this acute tightening phase was a reversal in trend inflation,
but at the cost of the deepest recession in post-war history.

By Myles Zyblock,february 2005

By our count, the Fed has been printing money at a faster rate than the economy's ability to absorb it since the late-1990s. Too much money chasing too few goods has not yet translated into accelerating inflation. Why?

We are convinced that excessive money creation in the US over the past several years will ultimately arrest the 25-year trend decline in inflation, if it has not already done so.

In the late-1990s, I began writing about what I thought was the making of an important shift in the conduct of monetary policy. The Federal Reserve was flooding the world with dollars in an effort to deflect shockwaves originating from the Asian currency crisis. Not long after that, they organized a bailout for Long Term Capital Management and then printed a mountain of money to safeguard against any potential disruptions stemming from the Y2K changeover.

One only has to look back at the Japanese experience in the 1990s to realize that falling price levels, combined with excessive leverage, can produce a corrosive economic outcome.

It cannot be that bad, can it?

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Världen flödar av pengar som väntar på att lånas ut. Räntorna är ovanligt låga för att vara i en så pass stark konjunktur.
Det är behagligt för stunden, men kan leda till både excesser och påföljande bakslag.

Johan Schück DN 5/2 2005

Situationen var inte förutsedd, utan har kommit som en överraskning. Som bekant lyckas ekonomer inte alltid så väl med att spå om framtiden. Däremot brukar de i efterhand kunna förklara vad som faktiskt har hänt.

Men de låga marknadsräntorna, även för lån med längre löptider, passar inte in i ett känt mönster. Inflationen har visserligen fallit tillbaka, vilket motiverar lägre nominella räntor. Däremot räcker det inte som anledning till att även realräntorna - räntor med avdrag för inflation - har kommit ner på rekordlåga nivåer.

I USA, som har några år av stark högkonjunktur bakom sig, ligger den reala tioårsräntan runt två procent. Det är rekordlågt, åtminstone i ett 20-årsperspektiv. De amerikanska räntenivåerna påverkar i sin tur övriga länders finansmarknader och bidrar till låga realräntor även där.

De låga räntorna räcker knappast - krediter för tillfället är ovanligt billiga. Sådant har inte så stor betydelse vid satsningar som ska vara lönsamma på längre sikt. Däremot berikar sig många hushåll på låga räntor genom att deras tillgångar stiger i värde. Särskilt gäller det bostäder, där lägre kapitalkostnader betyder att marknadspriserna drivs uppåt. Det bidrar även till att åtskilliga på köparsidan har haft god inkomstutveckling och är beredda att belåna sig högt.

Följden blir en kraftig ökning av huspriserna, även om styrkan i uppgången kan variera mellan olika länder. Storbritannien har haft en mycket snabb prisstegring, som under senaste tiden har brutits genom att Bank of England gång på gång har höjt styrräntan - senast till 4,75 procent. Sverige kan också visa upp en stark prisuppgång på närmare 75 procent under de senaste tio åren, medan den har varit långsammare i USA (se grafiken).

Huspriser ingår inte i den uppmätta inflationen. Men Riksbanken har ändå anledning att vara på sin vakt mot bubblor, där marknader pumpas upp och sedan löper risk att spricka. Tecken på sådant kan anas både på de internationella räntemarknaderna och på den svenska bostadsmarknaden.

Ingen vet när ett omslag kan komma, bara att det förr eller senare infinner sig.

Klart är i varje fall att Alan Greenspans mandatperiod går ut i början av nästa år, strax innan han fyller 80.

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Why long-term bond yields are low
OECD real interest rates also show a pronounced long term downward trend - from about 6 per cent in the mid-1980s to 2 per cent recently.
Samuel Brittan FT February 4 2005

The behaviour of bond prices is puzzling the financial markets.

There is little doubt that interest rates - international as well as US ones - are low for what is regarded as a recovery phase of the business cycle.

Part of this grumbling merely reflects "money illusion" - the failure to take inflation into account. The high returns previously experienced in nominal terms from holding bonds were partly compensation for the fear that dollars and pounds would shrink in real value. But OECD real interest rates, obtained by subtracting an inflation index from the nominal yield, also show a pronounced long term downward trend - from about 6 per cent in the mid-1980s to 2 per cent recently. The message is confirmed by the yield on UK index-linked gilt-edged, which is now in the 1½-2 per cent range. The yield on the more recently introduced US TIPs (Treasury inflation-protected securities) is now also down towards the 1½ per cent level. These low returns are all the more impressive in the light of the common belief that the dollar and sterling are both overvalued and that bond yields must contain a risk premium to allow for this.

There may be a more elementary explanation for low long-term real interest rates. Just as the price of bananas balances the supply and demand for this fruit, so the rate of interest balances the supply of savings against the demand for funds to invest. Monetary policy is important mainly at the short end and for its effect on inflation. But the important influence at the longer end is the balance of world savings and investment. Thus, I come to the simple hypothesis that falling real interest rates reflect a growing shortage of attractive investment projects to absorb savings. The world is indeed supposed to be short of capital and we are told that we do not save enough. But what matters in this context is not the developing world projects that might be desirable but the number of projects world-wide that promise a commercial risk-adjusted return.

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About Samuel Brittan

Samuel Brittan Home page


If a weaker dollar can’t do the trick, what can?
The answer, in my view, is real interest rates

The only way America can ever get a handle on its trade and current account conundrum is on the import side of the equation. After all, imports are currently 52% larger than exports (in real terms), making it almost mathematically impossible for the US to export its way out of its trade deficit.
In looking at real US interest rates over the broad sweep of history, there’s nothing but upside from current levels. The real federal funds rate remains around “zero” and the real rate on a 10-year Treasury note is down to its post-1986 low of 0.7%.
Stephen Roach 14/1 2005

The pundits who have been predicting higher interest rates based on large U.S. budget and current account deficits have some explaining to do.
It is odd that the broad field of U.S. deficit bemoaners, including a former Treasury secretary, an immensely successful investor, and the manager of the world's largest bond fund, have chosen to mislead the public on the major determinants of interest rates.
John Makin 21/12 2004

The Age of Inflation is finished
Over the past four decades, the rise and fall of double-digit inflation has been the most significant force affecting the U.S. economy.
Robert J. Samuelson Washington Post 2/12 2004

Inflation rose from a little less than 2 percent in 1960 to 13 percent in 1979 and then gradually descended to a little less than 2 percent in 2003. Going up, inflation generally harmed the economy -- causing harsh recessions, a stagnant stock market and lackluster gains in living standards. Coming down, inflation generally helped the economy -- leading to longer expansions, a stock market boom and stronger gains in living standards. That's the Age of Inflation in a nutshell, but it's barely understood.

As for declining inflation, its benefits have occurred in a gradual and almost invisible manner. We haven't paid much attention. Our economic debates blame or credit high-profile presidential policies (Reagan's tax cuts, Clinton's budget surpluses or Bush's deficits) or focus on more dramatic upheavals: the Internet or globalization. Inflation mattered more than any of these.

From 1969 to 1982, when inflation was highest, there were four recessions, including the two worst (1973-75 and 1981-82) since World War II. In 1982 unemployment peaked at 10.8 percent.

Economists subdivide interest rates into three components: an amount compensating for expected inflation (investors don't want to lose money to inflation); the "real return" earned by the lender or investor; and, finally, an "inflation risk premium" -- an amount covering the risk that no one can predict future inflation.

For example, the 12 percent rate on 10-year Treasury bonds in 1984 might crudely be decomposed as follows: 2 percent for the "real" return, 8 percent to compensate for expected inflation, and a 2 percent "inflation risk premium."

In 1965 the Dow Jones industrial average opened at 874.13; in 1982 the Dow opened at 875 -- 17 years and no gain

By January 1987 the Dow had doubled; today's level (about 10,500) is 12 times as much as its 1982 opening. People felt wealthier. They spent more. The economy advanced.

The economy must now move ahead without the powerful afterburners of soaring stocks or rapidly falling interest rates. These were the final chapters of the Age of Inflation. It's over. What comes next is anyone's guess.

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Kan man undvika recession i USA när man måste minska importen med 600 miljarder dollar?
Rolf Englund på Nationalekonomiska Föreningen 30/11 2004

Rolf Englund: Den svenska devalveringen 1982 kommer kanske i ett annat ljus mot denna bakgrund?

Det är en bra bit kvar innan Fed lotsat reporäntan till en nivå som betraktas som neutral - där räntan varken stimulerar eller bromsar den ekonomiska tillväxten.

Den nivån ligger runt 4,0 procent, enligt en analys i veckan som gjorts av Föreningssparbankens chefsekonom Hubert Fromlet (2-2,5 procents inflation plus 1,5-2,0 procents real kortränta).

Lars-Georg Bergkvist SvD Näringsliv 11/11 2004

My most certain idea is that real interest rates in the United States will have to be kept low, that the old Taylor rule is out
About bonds that are protected against inflation (TIPS/realräntepapper)
Bill Gross Investment Outlook November 2004

My/our most certain idea, as expressed in previous Outlooks, is that real interest rates in the United States will have to be kept low, that the old Taylor rule is out.

Too much debt in a finance-based economy precludes raising interest rates like we have in the past and while that keeps the patient/economy breathing; it leads to asset bubbles, potential inflation, and a declining currency over time.
How should an investor attempt to exploit this condition?
Buy the assets that are being bubbled, invest in bonds that are protected against inflation (TIPS, German bonds with less inflation risk) and short the dollar – all very carefully, by the way, as described in the above paragraphs.

But if the Fed and the economy face a low real short-term interest rate future, TIPS investors can take advantage. Since TIPS holders are protected 1 for 1 against increases in the CPI, the only thing they have to worry about is changes in real interest rates, the fundamental driver of TIPS prices.

Markets and life are never as simple as we pretend. Skim milk frequently masquerades as cream. But the thing I/PIMCO are most certain of in this uncertain environment is that real short rates must stay low – perhaps as low as ½%. The debt-laden finance-based U.S. economy is simply too fragile to tolerate what many consider to be more normal, Taylor-based real yields of 2% or so.

If so, assets that can lever off of an attractive low real rate and securities that are priced by real rates themselves (TIPS) offer opportunities as the marketplace adjusts to these new realities.

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The Taylor rule

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How can we be sure we don't have a recession coming in 2005?
the neutral real fed-funds rate for the post-equity-bubble U.S. has been closer to 0 percent than 2 percent
John Makin, Wall Street Journal 19/10 2004

With a couple of little tricks at its disposal, the government has made a practice of understating inflation, and by extension, overstating GDP and productivity.

- about "an important article by Pimco's high-profile portfolio manager Bill Gross
Bill Fleckenstein, CNBC 4/10 2004

Thanks to the publication last week of an important article titled "Haute Con Job," written by someone considered the country's foremost authority on bonds, Pimco's high-profile portfolio manager, Bill Gross.

"The CPI as calculated may not be a conspiracy, but it's definitely a con job foisted on an unwitting public by government officials who choose to look the other way or who convince themselves that they are fostering some logical adjustment in a New Age Economy dependent on the markets and not the marketplace for its survival. If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line. If real GDP growth is so high, tell me why this economy hasn’t created any jobs over the past four years.

"High productivity? Nonsense, in part -- statistical, hedonically created nonsense. My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less."

Gross pops off about the whole nonsense of core inflation -- which is, of course, another subject near and dear to my heart and completely and totally absurd -- because it strips out food and energy, two things that everybody must have:

"(There's a) con job perpetually foisted on the American public about the low level of inflation. 'Inflation under control' -- (ex food and energy, of course) shout the carnival barkers. 'The CORE is running at just under 2%,' the barkers shout with glee because a low CORE number tells us that we can continue to run monetary policy with negative real interest rates and fiscal policy with $400 billion deficits. A low CORE number allows us to pretend that American productivity is the best in the world, that the dollar should be strong, and that the markets, by golly, are going up. No matter that a gallon of gasoline is over two bucks or that a half-gallon of milk will set you back $3.69; the CORE is under 2%."

Lastly, Gross points out who is penalized by this cheating: "They disserve, of course, all of those who receive Social Security, as well as other private pensioners dependent on an accurate accounting of prices paid. They disserve buyers and holders of TIPS -- inflation protected securities -- which adjust inadequately to a faulty and near fraudulently calculated CPI that one day could total billions of dollars per year for TIPS holders. And they disserve all owners of U.S. Treasury obligations -- including foreign central banks and institutions. . . ."

One of these days, the world is going to figure this out.

One of these days, the world is going to figure this out. There will be a run on the dollar, and at some point, Treasury yields will be affected. One of my favorite expressions (besides this: In a social democracy with a fiat currency, all roads lead to inflation.) is: We know the government is going to cheat us, via inflation. The only question is whether they offer us a rate of interest that compensates us for this cheating.

Bill Gross article

Bill Fleckensteins article

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With inflation apparently conquered, it may not be surprising that yields are returning to levels regularly seen in the first half of the 20th century.
This, however, raises the question whether inflation really has been defeated.
Philip Coggan, Financial Times October 2 2004

Yields of 4 per cent look pretty low by recent standards (there was a brief nadir of 3.1 per cent for US yields last year). But in the light of the 20th century they do not look extraordinary. US yields averaged less than 4 per cent in 34 of the years between 1926 and 1962, according to the Barclays Capital Equity-Gilt study. Only when inflation took off in the 1960s and 1970s were yields forced higher. Thus, with inflation apparently conquered, it may not be surprising that yields are returning to levels regularly seen in the first half of the 20th century. This, however, raises the question whether inflation really has been defeated.

Nowadays, there are few restraints on the creation of credit and governments regularly run budget deficits. The build-up of debt that has resulted from these trends presents the world's monetary authorities with a dilemma. If the economy veers into recession, such debt may become a crushing burden. The problem is that the nominal value of debts is fixed, but the value of assets used as collateral to back those debts - and the income needed to service them - is not. The danger is widespread default and depression.

Central banks are keen to avoid those dangers; hence, the ultra-low interest rates maintained by the US Federal Reserve in recent years. Some critics argue that, because central banks will always attempt to head off a debt crisis by adding liquidity, inflation is inevitable in the long run. It is a more painless way of eliminating debt than depression.

The debate is complicated at the moment by the interaction of the Treasury bond market, the US current account deficit and Asian central banks' foreign exchange policies. The wide US current account deficit is being financed not by direct investment in factories or by portfolio purchases of equities, but by central bank purchases of bonds. As the deficit rises, therefore, there is a need for central banks to make more purchases, and this is holding down bond yields.

One should not discount, in the long term, the possibility that the inflationists might be proved right. So a holding in index-linked bonds should also be part of any cautious portfolio.

A real yield of 2 per cent may not seem very appealing. But any return that is positive in real terms will look very attractive if inflation picks up again.

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Oil and Stagflation
Given that the Chinese currency is pegged to the dollar, the Fed serves as central bank both for the United States and China.
/RE: inte bra med fast växelkurs, remember 1992/
eighteen to twenty-four months of negative real interest rates contributed to the sharp increase in growth rates in both countries
John H. Makin, AEI, August, 2004

With the onset of the Iran-Iraq War, prices rose above $35 a barrel-equivalent to $80 a barrel in current dollars. By 1979, the upward pressure on U.S. prices from more costly energy and accommodation by the Fed in the form of negative real interest rates boosted U.S. inflation to double-digit levels. In October 1979, the then-new Federal Reserve chairman Paul Volcker stepped in to cap inflation by allowing short-term interest rates to rise above 20 percent, driving the economy into a sharp recession.

Inflation plummeted, and the economy started to recover in the summer of 1982. Stock and bond markets began long-term rallies. In the case of the stock market, the rally lasted until March 2000. For bonds, ten-year notes reached a low yield of about 3.1 percent in the spring of 2003

The Fed's heavy stimulus with a negative real fed funds rate shortened the time it took demand to shift to capacity levels in the oil market. After all, given that the Chinese currency is pegged to the dollar, the Fed serves as central bank both for the United States and China. Eighteen to twenty-four months of negative real interest rates contributed to the sharp increase in growth rates in both countries and, simultaneously, to sharp increases in oil usage. That said, when deflation threatened, the Fed probably had no choice but to pursue negative real short-term interest rates since a deflationary spiral would have produced a worse outcome than the admittedly difficult one that results from sharply higher oil prices.

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Normalization Means Higher Inflation
John H. Makin, AEI, July, 2004

The U.S. economy, for most of the last fifty years, has grown at a rate of about 3 percent, while everyone wished for 4 percent. Inflation averaged about 3 percent, while everyone wished for 2 percent. Since the revival of 3 percent productivity growth after 1995, growth has averaged about 4 percent except during the brief 2001 recession. Last year, inflation dropped to about 1 percent and fear of deflation had more than a few policymakers actually wishing for 2 percent. Now we are heading back toward a more normal state of affairs with 3 percent growth and 3 percent inflation. Against the backdrop of the higher-growth, lower-inflation era just ending, the transition to such normalcy will be an uncomfortable one, carrying with it some problems for the Federal Reserve. How the transition is managed will determine whether or not inflation gets out of hand during the late post-bubble period.

Inflation expectations over the next year, as measured by the University of Michigan Survey of Consumers, have jumped to 3.4 percent, up sharply from a low 1.6 percent a year ago. That is far above the newly increased 1.25 percent level of the federal funds rate--not to mention the "fourth of July special" on the two-year note yield at 2.5 percent. That puts the expected real yield on the two-year note at minus 90 basis points, far below the average level of plus 340 basis points (adjusted by six-month annualized core CPI inflation) since that note's 1976 inception.

A move toward 3 percent growth and 3 percent inflation would constitute nothing more than a return to long-term trends for the U.S. economy. Growth has averaged 3.3 percent over the last decade, while inflation, as measured by the PCE Core Deflator, has averaged 1.7 percent. After twenty-two years of disinflation, most pronounced over the last decade, higher inflation is probably to be expected. In that environment, interest rates on ten-year notes have averaged about 6 percent while the federal funds rate has averaged 4 to 5 percent.

Inflation tends to rise and fall in long cycles of about twenty-five years. Maybe what we are seeing in nervous, directionless markets this summer is a gradually emerging sense that something familiar--falling inflation--is being replaced by rising inflation.

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In the late 1990s, Greenspan decided to ignore the growing bubble in technology stock prices.
By engineering negative real interest rates - that is, rates lower than the inflation rate - Greenspan has bolstered the economy at the risk of encouraging speculation.
Floyd Norris, International Herald Tribune 16/4 2004

What's particularly scary is how pathetic job growth has been, despite all the interest-rate cuts (nominal rates are near zero, and real rates are essentially below zero)
the two Bush tax cuts and now the refunds from the last cut. Despite it all, we still can't get enough jobs created
Bill Fleckenstein, CNBC 15/3 2004

Time-varying Nairu and real interest rates in the Euro Area
Deutsches Institut für Wirtschaftsforschung (DIW Berlin) 2003



The fall in real yields
Rising real yields may come as a nasty shock to the stock market
By Philip Coggan, Investment Editor FT.com site; Feb 23, 2004

Real yields seem to have fallen around the globe. That may help explain why the equity market has been in such good health over the past year. The fall in real yields is clearly observable in the index-linked government bond market.

In the US, the real yield on 10-year TIPS (Treasury inflation protected securities) has been hovering around 1.8 per cent.

In the UK, the yield on index-linked gilts is a little under 2 per cent, assuming a modest inflation forecast.

This is a sharp contrast with real rates only two years ago, when TIPS were offering a remarkable 3.5 per cent. At the time, investors were puzzling why rates were so high; in retrospect, they were staring at a wonderful bargain.

Why have real rates fallen so far? One explanation could be that the TIPS rate is distorted. Eric Lonergan, global strategist at Cazenove, points out that TIPS are linked to the headline consumer price index. But the Federal Reserve monitors the PCE (personal consumption expenditures) deflator as its measure of underlying inflation. As it happens, inflation measured by the consumer price index has been consistently higher than that measured by the PCE deflator; Lonergan says the cumulative difference over the past few years has been six percentage points. The main reason has been oil, which is excluded from the PCE deflator measure.

Thus, since underlying inflation has been lower than the headline figure suggests, that means real yields have been higher. Lonergan suggests the "true" real yield, using the PCE deflator, may be as much as 2.5 per cent, which is not that low in historical terms.

Significantly, perhaps, the UK index-linked market also used an inflation measure separate from that targeted by the Bank of England. The Bank is now targeting the consumer price index (a measure also known as the harmonised index of consumer prices). That figure excludes council tax rises and housing costs and is calculated in a different manner from the retail price index, to which gilts are index-linked.

But there are some who believe the fall in real yields is both valid and perfectly explicable. Goldman Sachs says that real yields are low for two main reasons. First, it is clear that most of the world's central banks (the Bank of England is an obvious exception) intend to keep short rates low for the forseeable future, in order to head off deflationary pressures.

Second, low real yields have been sustained because of the balance between the supply and demand for funds. The corporate sector has spent much of the past three years trying to repair its balance sheet and has had some success in doing so, thanks to a revival in profitability and some large secondary equity issues. It thus has had little need to borrow. Meanwhile, the turnaround in Asia's financial position over the past few years has created a vast pool of savings for the US to draw on. So, even though the US and European governments have been moving into fiscal deficits, there has been more than enough savings around to absorb the government bond issuance.

Inevitably, these factors will not persist. At some stage, even the Federal Reserve will want to move short rates up to more "normal" levels, although this may not happen till 2005 at the earliest. As companies become more confident about the future, they may decide they need funds for expansion - more funds than they can supply from their internal resources. And it is also possible that the focus of Asian economic growth could shift from exports to domestic demand, cutting the supply of global savings. All these factors would push real yields higher.

Whether or not Cazenove is right, equities have clearly benefited over the past year from the perception that yields on alternative assets are low. Rising real yields may thus come as a nasty shock to the stock market. But Goldman does not think this threat will materialise until 2005.

Doom on Wall Street


Genom att räkna bort vissa kostnader från KPI, som räntekostnader för egnahem, fick man fram den underliggande inflationen.
Leif Petersen, SvD Näringsliv, 20/11 2003

Först var det inflationen enligt KPI (konsumentprisindex) som gällde. Det är ett lättfattligt mått men är trots det väldigt invecklat att beräkna. I slutet på 1990-talet började man använda andra inflationsmått för att öka träffsäkerheten i prognoserna. Genom att räkna bort vissa kostnader från KPI, som räntekostnader för egnahem, fick man fram den underliggande inflationen. Den hade olika namn beroende på vad som drogs bort.

I Sverige var det inflationsmåttet UND1X som användes för att styra mot det tvåprocentiga inflationsmålet. Vad som hänt under senare tid är att Riksbanken använt sig av UND1X och dessutom tagit bort vad man kallar tillfälliga prisstörningar som kostnaden för galna ko-sjukan eller höga elpriser.

No inflation?
The Fed says it can't find much inflation anywhere. Consumers might argue otherwise

"owners' equivalent rent of primary residence" - bostadsposten spökar äver här
Bond investors have been steadily buying Treasury inflation-protected securities
By Justin Lahart, CNN/Money Senior Writer November 14, 2003

In computing the CPI, the Bureau of Labor Statistics assigns a 22.2 percent weighting -- the most of any item -- to something called "owners' equivalent rent of primary residence." Basically, it's an estimate of what homeowners might pay in rent if they rented their homes instead of owning them.

home ownership rates are at record highs. As a result, rents have come under pressure, and "owners' equivalent rent" has grown at just 2.1 percent over the past year -- less than the overall CPI.

Another big chunk -- 8.2 percent -- of the CPI is new and used motor vehicles. Over the past year vehicle prices have fallen 3.6 percent, thanks to tough competition. Another big chunk -- 8.2 percent -- of the CPI is new and used motor vehicles. Over the past year vehicle prices have fallen 3.6 percent, thanks to tough competition.

Bond investors aren't so sure. They have been steadily buying Treasury inflation-protected securities, or TIPS, the returns on which rise and fall with inflation. As a result, the spread on the yield between 10-year TIPs and 10-year Treasurys has grown to 2.38 percent -- the widest difference since 2000.

Putting it another way, even though 10-year Treasury yields haven't risen as much as some analysts might expect, it's been three years since the bond market has been so worried about the prospect of inflation.

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Passa på att köpa Moder Sveas inflationssäkrade obligationer före årsskiftet.
Nästa år, när nya redovisningsregler träder i kraft, blir det rusning.

Gunnar Örn i DI 29/11 2002

EMU bäddar för bråk
Stefan de Vylder

Göteborgs-Posten 2002-10-22
RE: En lysande artikel

En gemensam räntepolitik i ett valutaområde innebär med nödvändighet att räntan blir för hög i vissa länder - de som behöver stimulera ekonomin - och för låg i andra. Detta helt oberoende av hur väl den europeiska centralbanken sköter sitt jobb.

Det faktum att den nominella räntan är gemensam i en valutaunion innebär dessutom automatiskt att realräntan blir lägst i de länder som har den högsta inflationen, det vill säga de som skulle behöva en hög ränta, och högst i de länder som skulle behöva stimulera ekonomin. En inbyggd perversitet.

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Behovet av ett nytt ekonomiskt tänkande
/ finansiella bubblor/Mattias LundbäckSvD Inblick 2002-10-04

The End of the Age of Inflation
By Robert J. Samuelson

Washington Post, August 28, 2002

Realräntefonder attraktivt alternativ
Dagens Industri 2002-07-23
Reporter Viktor Munkhammar

Inflation can be too low
By Samuel Brittan

Financial Times, June 5 2002 20:42

Högre inflationsmål får stöd
DI 2002-05-30

Hurra, vilket härligt börsras!
Thomas Franzén intervjuad i FinansVison 2002-05-02

Riksgäldskontorets ledning och förre börschefen varnar:
"Banker vilseleder aktiespararna" (realränta)
DN Debatt 2002-03-19

The 1990s’ Boom Went Bust. What’s Next?
Milton Friedman
Wall Street Journal 2002-01-22
While the current rate of monetary growth of more than 10% is sustainable and perhaps even desirable as a defense against economic contraction and in reaction to the events of Sept. 11, continuation of anything like that rate of monetary growth will ensure that inflation rears its ugly head once again.

A poor defence for share prices
Martin Wolf Financtial Times, Oct 23 2001

Negativ realränta
Dagens Industri 2001-10-04

A real interest rate is the compensation, over and above inflation, that a lender demands to lend his money.
With link to The Treasury

Nouriel Roubini and David Backus Lectures in Macroeconomics
Chapter 5. Output and Real Interest Rates

Are Real Interest Rates Too High?
William Poole, President, Federal Reserve Bank of St. Louis

Money Marketeers of New York University New York City
September 21, 1999

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A world without inflation
By Ed Crooks, FT, January 2 2003

What Japan's experience also shows, however, is that deflation can catch policymakers unawares. If western economies slip into deflation, they may be more vulnerable precisely because of their settled assumption that prices will always rise.

"If we get deflation, it would put further downward pressure on markets and have the potential for very bad outcomes indeed," says Andrew Milligan, head of global strategy at Standard Life Investments. "Companies are already finding it difficult to cope with their debts and corporate bond yields and falling prices are not a good combination. They would have to cut jobs to make a profit, which would hit housing and consumer markets."

Resistance to wage cuts could make the pain of deflation even worse. Kenneth Rogoff, chief economist of the International Monetary Fund, argues that in Germany, for example, the high level of pay settlements may lead to more jobs being lost and companies going bust. "Corporations may not have the pricing power to pass on wage increases and a further deterioration in bank balance sheets could also feed back negatively into prices," he says.

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Passa på att köpa Moder Sveas inflationssäkrade obligationer före årsskiftet.
Nästa år, när nya redovisningsregler träder i kraft, blir det rusning.
Gunnar Örn i DI 29/11 2002

Passa på att köpa Moder Sveas inflationssäkrade obligationer före årsskiftet. Nästa år, när nya redovisningsregler träder i kraft, blir det rusning. Då kommer svenska börsbolag att behöva köpa realränteobligationer för att trygga sina pensionsskulder. Det spår två studenter vid Handelshögskolan i Stockholm i en magisteruppsats. Ruschen kommer att driva upp priset och pressa ned räntan på realobligationerna, spår författarna Pär Pettersson och Joel Grönberg.

De jämför med vad som hände i Storbritannien, där en ny regel för pensionsavsättningar, "Minimum Funding Requirement", fick realräntan att halveras på två år.

När Sverige går över till den nya, internationella redovisningsstandarden IAS (International Accounting Standard) väntas utvecklingen gå åt samma håll här.

De nya reglerna berör framför allt avtalspensionerna för tjänstemän, de som regleras av den så kallade ITP-planen.

I dagens svenska redovisning ska dessa pensionsskulder värderas utifrån en fast realränta på 3,65 procent. Enligt IAS-reglerna ska de i stället värderas utifrån aktuella marknadsräntor. Och då behövs det bara små ränteförändringar för att få pensionsskuldens värde att svänga våldsamt.

"Skuldvärdet för en typisk skuld varierar cirka 15 procent för varje procent som diskonteringsräntan ändras", skriver Pettersson och Grönberg.

Värdeförändringar på pensionsskulden slår direkt mot bolagens resultat. Bolag som vill minimera den finansiella risken i sina pensionsåtaganden, gör därför klokast i att placera hela sin pensionsskuld i realobligationer med lång löptid, menar författarna.

(Realobligationer ger en garanterad ränta ovanpå inflationen. Om realräntan är 3 procent och inflationen 2 procent blir den totala avkastningen 5 procent.) Men det befintliga utbudet av realobligationer räcker inte för att trygga företagens pensionsskulder. Inte på långa vägar.

Svenska företag har i dag tre olika sätt att trygga sina anställdas framtida ITP-pensioner:
Betala pensionspremier till försäkringsbolaget Alecta.
Bokföra pensionsskulden i balansräkningen.
Sätta av pengar till en egen pensionsstiftelse.

"Den totala pensionsskulden som företagen har i balansräkningen eller i stiftelser, bara inom ITP-planen och liknande planer, är i dag 103 miljarder kronor", konstaterar författarna.

Den totala utestående volymen statliga realobligationer är bara 94 miljarder.

Skulle dessutom Alecta placera en större andel av sina 330 miljarder i realobligationer, blir följden en "efterfrågechock av betydande storlek", som författarna uttrycker det.

Tror man på resonemanget är slutsatsen given: Köp realobligationer medan tid är.

se diagram

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The End of the Age of Inflation
By Robert J. Samuelson
Washington Post, August 28, 2002

The Age of Inflation is ending the way it began: quietly. Along with the Cold War, the rise and fall of inflation has been a defining event of the present era -- but one that is overlooked, because inflation receded so gradually that almost no one appreciates its historic significance.

One reason inflation is forgotten is the passage of time. About 30 percent of Americans weren't alive in 1980, the era of double-digit price increases. Even today's 35-year-olds were only 13. They barely remember. But another reason is that people don't recognize that inflation's decline has been almost as powerful as its rise.

Economically, two broad possibilities suggest themselves. One is optimistic. It envisions greater economic stability. Because high inflation bred instability -- leading to stop-go policies of easy and tight credit -- its demise implies fewer and milder recessions. This has certainly been the experience since 1982 after double-digit inflation was subdued. By historical standards, the 1990-91 recession was tame. For all the complaining, the same has been true (so far) of the latest downturn. A grimmer possibility is that new instabilities are emerging. The fallout from the stock market "bubble" and the tech boom may hobble the economy for years. The global economy may be inherently weak, because Japan and Europe are incapable of healthy expansion, and "emerging market" countries are vulnerable to currency crises. Deflation -- falling prices that would create a profits squeeze -- could result from worldwide industrial overcapacity and feeble demand.

Easier to explain is the Age of Inflation. It resulted from a well-intentioned intellectual mugging. Disciples of British economist John Maynard Keynes (1883-1946) argued that governments could, through the shrewd manipulation of budgets and interest rates, reduce unemployment and eliminate recessions, with only a tiny rise of inflation. They were wrong, but their recommended budget deficits and easy-credit policies -- once adopted -- created a wage-price spiral and inflationary expectations. Believing government would tolerate inflation, workers and companies had little reason to curb wage and price increases. Only decades later have these expectations been finally purged.

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Realräntefonder attraktivt alternativ
Dagens Industri 2002-07-23
Reporter Viktor Munkhammar

Börsen har backat i drygt två år. Inflationen har det senaste året legat på de högsta nivåerna sedan 1995. I dagens läge är realränteobligationer ett attraktivt alternativ för den som vill spara.

Skandias realräntefond gav första halvåret en avkastning på 5 procent.

Realräntan är skillnaden mellan den nominella räntan (den exempelvis banker skyltar med) och inflationen. De senaste åren har det dykt upp flera sparalternativ baserade på den reala räntan.

Ett är fonder som investerar i realränteobligationer. Finanskoncernen Skandias realräntefond gav under årets första sex månader en avkastning på 5 procent. Det var betydligt bättre än andra av bolagets räntefonder; den vanliga obligationsfonden gav 2,1 procents avkastning och likviditetsfonden 1,8 procent. Avkastningen på aktiefonder vill spararna nog helst glömma.

Intresset för sparformen har också ökat. Fondförmögenheten i Skandias realräntefond har fördubblats sedan årskiftet och ligger nu på 1,2 miljarder.

Peter Friberg, VD för Skandia fonder, varnar för att det första halvårets goda avkastning sannolikt är en tillfällighet. "Inflationen plus 3,5 procentenheter på helåret är mer normalt", säger han.

Det innebär en nominell avkastning på 5,5 procent, förutsatt att Riksbanken klarar av att hålla inflationen på 2 procent. Det ska jämföras med bankernas sparräntor som sällan ligger över 3-4 procent.

Också Riksgäldskontoret, som sköter statens upplåning och skuldförvaltning, har märkt av ett ökat intresse för realräntor. "Vi kommer att öka emissionsvolymen av realränteobligationer med 4 miljarder kronor under hösten", säger Marja Lång, informationschef på Riksgäldskontoret.

Intresset från privatpersoner ökar också. Då gäller det främst Riksgäldens konton med real ränta. De fungerar ungefär som ett vanligt bankkonto men sparandet är tidsbestämt och ger en garanterad ränta utöver inflationen.

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Hurra, vilket härligt börsras!
Thomas Franzén intervjuad i FinansVison 2002-05-02

IT-bubblor, börsras och eländiga Ericsson-rapporter har urholkat svenskarnas förtroende för aktier men på Riksgäldskontoret välkomnar man utvecklingen. ”Börsnedgången är ett ’vårljus’ som synliggör skavankerna i det finansiella systemet”, säger verkets generaldirektör Thomas Franzén.

Riksgäldskontoret som sedan många år försökt öka svenskarnas intresse för räntepapper har fått vatten på sin kvarn. ”I spåren av börsutvecklingen har människor börjat se över sitt sparande på ett annat sätt än tidigare. De vill ha en god ränta och nöjer sig inte längre med vanlig bankränta”, säger verkets generaldirektör Thomas Franzén. ”Även hos de stora placerarna märker vi ett nytt intresse. Vi hade en nyemission av en realobligation för några veckor sedan som övertecknades sju gånger av institutionella aktörer, det skulle inte ha hänt för ett år sedan då intresset var betydligt svalare”, säger Thomas Franzén.

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Riksgäldskontorets ledning och förre börschefen varnar:
"Banker vilseleder aktiespararna" (realränta)
DN Debatt 2002-03-19

Aktieanalytiker diskuterar nu när den så kallade vändningen kommer. Bilden är att nedgången snart är över och då återgår vi till den gamla "sanningen": att aktier sett över ett tiotal år alltid är en bättre placering än obligationer.

För att belysa hur den schablonbild av aktier som vi givit exempel på ovan stämmer med historiska data har vi valt att jämföra realavkastning på aktier sedan 1919 med en realränta på 3,5 procent, vilket är vad statens långa realobligationer avkastar och som i några internationella studier anges som ett rimligt antagande för den genomsnittliga realräntan under 1900-talet.

Risken för riktigt dåliga utfall - perioder då aktiemarknader under en mycket lång tid utvecklas svagt - talar man sällan om. Zvi Bodie, professor vid Boston University i USA, visar på att risken för mycket dålig värdetillväxt på aktier är större på lång sikt än på kort. Intuitivt är detta inte svårt att inse. Risken för ett ras på, säg, 50 procent är rimligen större på några års sikt än under ett enstaka år. Så skedde också under 1930-talskrisen, och det sker sedan slutet av 1980-talet i Japan, där aktiekurserna sen toppen 1989 fallit med cirka 75 procent. Synen på risker med aktiesparande är därför väsentligt annorlunda i Japan än i Sverige.

Vi menar att det finns stor risk att mycket av det långsiktiga sparande som i dag byggs upp i pensionssystem och i normalt privatsparande i allt för stor utsträckning placeras på grundval av en för optimistisk syn på avkastningen på aktiesparande. I sådant fall kan vi få ett bakslag som innebär att människor blir alltför rädda för aktiesparande vilket skulle minska utbudet av riskkapital och skada den ekonomiska tillväxten.

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A poor defence for share prices
Martin Wolf Financtial Times, Oct 23 2001

I know that I do not know what is going to happen to equity prices. All any economist can contribute is a little logic and a little history. From these one can derive two things: an idea of probabilities and an ability to distinguish the arguable from the nonsensical.

From 1997 to early 2000, the US stock market reached valuation levels that were, on the basis of empirically and theoretically sound indicators, higher than at any other time in the 20th century. The chances that the market would fall were higher than the chances that it would rise. Nevertheless, the market continued to rise until it ceased to do so.

As I argued last week (October 17), even at present valuations returns on US stocks will probably be far below their historic average of 6-7 per cent a year, in real terms. But there is a huge stockbroking industry dedicated to convincing its clients that this cannot be true.

Their job is to find measures that show equities are cheap when they are expensive.

At present, the indicator of choice for market bulls is the relationship between the yield on bonds and the earnings yield on equities. Conveniently, in the US the ratio has fallen to 1.3 from a peak of 2.1 in January 2000. Unfortunately, as I stated last week, the ratio is “worthless”, because it divides a nominal return by a real one.

What I thought would be an uncontentious statement proved quite the opposite. People have told me that there has to be a relationship between interest rates and earnings on equities. So how, they ask, can the yield/earnings ratio not be telling us something? The answer is that what the ratio says, if anything, depends on why it is changing.

Earnings on equity are a claim on a share of profits. Profits are derived from real activity, more precisely on a company’s ability to use real things (its assets and its inputs) to make real things (its outputs).

But the yield on a conventional government bond is a promise to pay a given stream of money until maturity.

That yield will depend on the real interest rate and inflation. The real interest rate will depend, in turn, on time preference and the prospective rate of economic growth. The inflation component will depend on expected inflation and inflation risk.

Inflation is a sustained rise in the general price level, not a change in relative prices.

To simplify, consider an irredeemable bond issued with a coupon of $7 and a face value of $100, when the expected real rate of interest is 3 per cent and expected inflation is 4 per cent.

Suppose expected inflation falls to 2 per cent. If one ignores rounding errors, the price of the bond rises to $140 and the yield falls to 5 per cent. The owner of the bond has made a $40 capital gain - but the yield for any new purchaser gives the same real return as before.

Now what does the fall in inflation do to the earnings yield and price of an equity? To simplify, the answer is absolutely nothing.

To see this, assume for simplicity that the real return demanded from equities is the same as the real interest rate - the “equity risk premium” is zero. Assume also that the pay-out ratio is 100 per cent. The price of an equity expected to give earnings this year of $3 is $100.

If inflation were to be 4 per cent, next year’s equity price would be $104. If inflation were 2 per cent, next year’s price would be $102. If one purchased a share and sold it next year, the money return would be $7 and $5, respectively, with $3 from the earnings and $4 and $2, respectively, from the rise in the price.

The nominal and real returns would be the same as on the bond, as required.

If inflation falls, the ratio of the bond yield to the earnings yield will fall but there will be no effect on the price of equities now. The change in the yield ratio will also say nothing about the advisability of buying shares. All it does is indicate an alteration in the expected path of future nominal earnings and equity prices.

That is the theory. What about reality? The era of disinflation, from the early 1980s to the late 1990s, was a period when bond yields and earnings yields both fell. In contrast, the era of rising inflation between 1948 and 1968, saw a rise in bond yields and a fall in earnings yields. In Japan, in the 1990s, there has been no relationship: bond yields have collapsed with no visible effect on the earnings yields on equities.

This is a broken indicator. So why is there ever a relationship? To answer this, one needs to consider the two elements: inflation and real interest rates.

In the 1950s and 1960s, a combination of buoyant profitability with the desire for hedges against inflation gave the inverse relationship between bond yields, which rose, and earnings yields, which fell.

In the 1970s inflation exploded, partly because of the adverse shift in the terms of trade, after the oil price shock, and partly because of struggles over the distribution of income between wages and profits. Profits were squeezed, even more so than published accounts suggested, because of the fiction of historic cost accounts. So bond yields soared, together with equity yields.

In the 1980s and 1990s inflation fell, as oil prices declined and labour markets were deregulated. Profits recovered and the quality of reported profits improved. As bond yields fell, so did the earning yield.

Thus the link between inflation, bond yields and the price of equities is complex. It is neither mechanical nor easily predicted.

Sometimes there are changes not in inflation but in real interest rates. If expected future growth rates rise, so should real rates of interest. But if the equity risk premium were unchanged, rising real rates of interest would lower the price of equities. The familiar argument that superior growth prospects necessitate higher prices for existing equity is wrong. The opposite is more likely.

There are at least four conclusions.

First, a change in the expected rate of inflation will alter the yield on bonds but should have no effect on today’s price of shares.

Second, if that is not true, it is because inflation is having real effects - on wealth or the level and distribution of income - or is altering the accuracy of reported earnings.

Third, where changes in the yield on bonds reflect changes in real rates of interest, the price of equities should change. In general, higher prospective rates of growth are as likely to lower the equilibrium price of equities as to raise them.

Last but not least, there is no consistent exploitable relationship between the yield on bonds and the price of equities.

Interest rate movements are telling us something: but what they are saying is complex. People who market shares on nothing more than the ratio of bond yields to earnings are quacks.

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Negativ realränta
Dagens Industri 2001-10-04

USAs styrränta ligger på rekordlåga 2,5 procent samtidigt som inflationen uppgick till 2,7 procent i den senaste mätningen. Därmed är realräntan (styrräntan minus inflationen) negativ. Det har inte inträffat sedan lågkonjunkturen i början av 1990-talet, och dessförinnan inte sedan i början av 1980-talet.

“Detta är chockterapi, något man bara tar till när det ser rejält risigt ut”, säger Mats Kinnwall, chefsanalytiker på Handelsbanken.

Federal Reserves agerande betyder att USA-ekonomin förses med “högoktanigt bränsle”, konstaterar han. Med en negativ realränta minskar sparat kapital i värde, medan det lönar sig att ta lån och konsumera.

“Hushåll och företag får betalt för att låna pengar, det är vad det betyder”, säger Mats Kinnwall.

Även i Sverige är realräntan just nu rekordlåg, även om det återstår några tiondels procentenheter innan den blir negativ. Reporäntan ligger på 3,75 procent och inflationen strax över 3 procent.

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Barry Riley, FT, May 18, 2001
The greatest concentration of gloomy experts worrying about this is to be found in the bond markets. Bond investors are people from whom inflation steals wealth to cross-subsidise the borrowers and spenders.

Until early this year they rubbed their hands with delight at the prospect of a global economic slowdown: the prospective inflation rate implied by the gap between fixed and inflation-protected US Treasury bond yields dipped to 1.3 per cent.

Recent rate-slashing by the Fed has wiped the smiles off their faces. Within a few months the inflation implied by market yields has soared to 2.5 per cent.

And in just two months the yield on the US Treasury's 30-year bond has jumped by two-thirds of a percentage point.

Barry Riley, FT, May 18, 2001

Forgotten but not gone:
Inflation is not a problem, unless we forget about it
BARRY RILEY Financial Times; May 19, 2001

An interest in inflation
Financial Times, Editorial comment, May 11, 2001

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Alternatives to inflation targets
Samuel Brittan: Financial Times 01/03/01

There was once an alternative theory of monetary policy different to both the inflation target version of monetarism and the Keynesian emphasis on stimulating output directly. This was the so-called "Austrian" school, which in its turn drew on a Swedish economist of a century ago, Knut Wicksell.

The latter distinguished between two rates of interest. There was the actual market rate;and there was also the unobservable "natural rate" which would be bring intended savings and investment into line if there were no distortions introduced by the monetary system. The aim of monetary policy should to be "neutral"; in other words to try to minimise divergences between the natural and the market rates.

The "Austrians", in particular Von Mises and Hayek, emphasised that it was not sufficient to try to keep the general price level stable. Quite apart from index number problems - which they overemphasised - the main harmful effect of inflation and deflation came, they argued, from distortions in relative prices which could occur even if the overall price index remained fairly stable.

They emphasised particularly the malinvestment which would result if production became either too capital intensive or not intensive enough. One still controversial example is that of the behaviour of the Fed in the 1920s, leading up to the 1929 crash.

While the monetarists believe that the Fed of those days was too tight, the "Austrians" considered, even at the time, that it was from 1927 onwards, too expansionary in promoting an investment boom which could not last.

A similar controversy surrounds the period since the mid-1990's, during which US inflation has remained low and stable, but when there were many signs of a rush into fashionable investments in IT and elsewhere.

During the interwar period the Austrian school discredited itself by insisting that the depression should run its course, to allow mistaken investment to be liquidated. Lionel Robbins of the London School of Economics, who had earlier supported such views, made a well-known recantation. Even "assuming that the original diagnosis of successive financial ease and mistaken real investment was correct" to take no action against the ensuing depression, he remarked, was "as unsuitable as denying blankets and stimulants to a drunk who had fallen into an icy pond, on the ground that his original trouble was overheating."

Since the early 1970s there has however been a revival of Austrian economics, not anywhere near Vienna, but mostly in the United States where it is now a sufficiently important minority movement for respectable economic publishers to maintain sections of their lists devoted to it.

Like all such minority movements the new "Austrians" have their quota of fanatics and cranks. Indeed when one of the more sophisticated of them attempted a semi-mathematical exposition of the school's teachings, he received hate mail from some who thought that he was being disloyal to the anti-mathematical gospel of von Mises. But at the other end of the spectrum there are "Austrians" well aware of modern techniques, as well as of mainstream economics and of what is going on in the economy. One of the best examples can be found in a book with the unnecessarily forbidding title of Microfoundations and Macroeconomics, by Steven Horwitz, (Routledge, 2000@.

The emphasis is on the need to shift from monetary or inflation targets to some attempt at neutral money. He is less convincing on how to do so. Like many other modern Austrians he has endorsed Hayek's last idea of competitive private enterprise currencies to allow market forces to adjust the supply of money and other financial instruments to the desire of the public to hold them.

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PM Realränta - Rolf Englund 0102

JAMES GRANT, Financial Times; Oct 30, 2000
The writer is chairman of Grantsinvestor.com

The market expects no untoward events - its implied long-term inflation forecast is pure sunshine. Over the next seven to 10 years, it can be inferred, the CPI will rise by an average of no more than 1.8 per cent a year - never mind that over the past 12 months it has climbed by 3.5 per cent.

(This is the forecast embedded in the respective prices of inflation-indexed and non-indexed government bonds; at an annual average rise in the CPI of 1.8 per cent, indexed and non-indexed securities would perform identically.)

Bonds do not go up like stocks but they do crash like them.


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Peter Norman, VD för Sjunde AP- fonden
DN Debatt 2000-10-28

Den produkt som ligger närmast till för pensionssparande är realränteobligationer. En obligation som ger en garanterad avkastning utöver inflationen. För närvarande är räntan 3,5 procent plus den nuvarande inflationen på 1,5 procent. En totalavkastning på nominellt fem procent som kan uppnås med säkerhet. Ett realt sparande borde erbjudas alla pensionssparare och vara bottenplattan i varje portfölj som syftar till ett långsiktigt sparande.

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Thomas Franzén, chef för Riksgäldskontoret, varnar för att inflation och valutakursförändringar riskerar att tära på avkastningen i de drygt 450 privata fonderna.
DI 2000-10-06

"Det allvarligaste är att man inte tar upp inflationsrisker och inflationsproblematik i ett så långsiktigt sparande som pensionssparandet är".

Historiskt har inflationen varit den vanlige spararens stora fiende, skriver han i Post- och Inrikes tidningar. "Ingen vet vad inflationen blir. Det finns en poäng att gardera sig mot den", säger Thomas Franzén.

Ett sätt att göra det är att investera i realränteobligationer, ett instrument som Riksgälden själv saluför. Det tillgångsslaget placerar bara två PPM-fonder i: Statens Premievalsfond och Premiesparfond. De går under namnet Sjunde AP-fonden.

Ett annat problem med de privata PPM-fonderna är enligt Riksgäldschefen att få, om ens några, valutasäkrar sina placeringar. Valutakursförändringar tär ibland allvarigt på fondavkastningen. Det har de till exempel gjort under det senaste året i Europafonder.

Sjunde AP-fonden använder sig dock av valutakurssäkringar. Detta, i kombination med deras inflationssäkring, gör att Thomas Franzén tänker välja att inte välja. Då hamnar han i Premiesparfonden.

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Throwing Cold Water On Dow 36,000 View
Wall Street Journal, September 21, 1999

The latest sensation among investment books is a bestseller called "Dow 36,000," which argues that the Dow Jones Industrial Average should be worth three times its current value.

Sound intriguing? Before you purchase the book - yet alone buy the argument - take a moment to listen to Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School.

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UK Real Interest Rates

BNP-tillväxt och realavkastning, aktier och obligationer,
1951 - 1996, i procent, Sverige

Statens realobligationer förlustaffär för sparare - Gunnar Örn i DI 1998-12-09

För en originell synpunkt, se Gunnar Eliasson

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From Financial Times Lex SEPTEMBER 16, 1998

Deflation is the new investment bogeyman; overheating is yesterday's story. It seems a strange time, then, for France to be dipping its toe in the water as the first euro-zone issuer of inflation-linked bonds. After all, governments have traditionally resorted to these when inflation was a pressing concern. But the current growth outlook suggests falling inflation and interest rates - a recipe for preferring nominal bonds.

For all that, yesterday's auction got off to a good start - no surprise, perhaps, given the small size of the issue and the government's desire not to scare off novice investors. But for long-term holders, at least, there is also a respectable investment case. After all, the 3 per cent real yield offered compares with a 4.15 per cent yield on conventional French bonds.

Subtract in a small risk premium and the somewhat optimistic implication is that inflation will average under 1 per cent over the next 10 years.

Europe's ageing population - and the associated growth in the pensions industry - may encourage more inflation-linked issuance. Pension funds need to match real liabilities with real assets. Investors would also be right to worry that countries with large unfunded pensions liabilities might be tempted to succumb to inflation. For these reasons, inflation-linked bonds should not suffer for want of demand, and other EU issuers will surely follow France's example.


September 1, 1998 /U.S./ Treasury's new inflation-indexed I-Bonds go on sale today at banks and other financial institutions.

I-Bonds are designed to offer all Americans a way to save that protects the purchasing power of their investment while assuring them a real rate of return over and above inflation.

The fixed rate for I-Bonds purchased in September and October 1998 is 3.40 percent, and the Earnings Rate is 4.66 percent.

What is the difference? http://www.publicdebt.treas.gov/sav/sbieevsi.htm

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The Clinton administration plans to unveil a new type of government savings bond whose return will rise and fall with inflation, to protect investors' gains as well as to help finance the federal debt.

The bonds will be sold in eight denominations, ranging from $50 to $10,000, and will mature in 30 years. Most of the denominations, which bear the likenesses of Helen Keller, the Rev. Dr. Martin Luther King Jr., Albert Einstein, and others, are to go on sale in September. Two more denominations _ $200 and $10,000 _ will go on sale next May.

In announcing the new securities, Vice President Al Gore plans to promote them as offering an attractive means for middle-income people to prepare for their retirements or a child's education. Referring to the bonds as ``inflation insurance,'' a senior Treasury official said on Tuesday that he expected them ``to be attractive for people who want to be able to guarantee that they're earning a substantial inflation-adjusted return on their money, that'll double their money in real terms in less than a generation.''


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Fler länder ger ut index-papper

After Hungary's launch last month of an inflation-linked government bond and Sweden's issue this week of a new 30-year linker, the next move is likely to be up to France, which is planning an inflation-linked issue soon that will set a benchmark for Euroland. ...

... linkers are still some way short of forming a coherent global asset class. Curiously, the most obvious current anomaly is evident not in the smaller or newer markets, but in the long-established and relatively liquid UK index-linked gilts. This sector is valued at almost $100bn, twice as much as the equivalent US Treasury Inflation Protected Securities (Tips), although the Americans have come a long way in two years.

Real yields in the range 3.5-4 per cent have been typical for UK index-linked gilts over the past decade or so, and the same range applies at present around the world - subject to slight differences in the formulation of the bonds. Yet UK linkers currently offer only about 2.6 per cent.

The tumble in the real yield from 3.6 per cent in little more than a year has powered a 12-month total return on the longest-dated linkers of more than 30 per cent (more than on the All-Share index). This is remarkable for what had gained a reputation as a distinctly dreary asset class in the previous 15 years.

Some of the more value-conscious UK pension fund managers, like PDFM, have responded by switching into US Tips, which yield about 3.7 per cent real. One rationalisation is that high Tips yields reflect the slowness of US investors to understand the merits of the bonds and develop a valuation methodology.

... Index-linked gilt yields have been squeezed down by the sudden tumble in the effective yield on UK equities to under 2.5 per cent. They have also been depressed by the need to accommodate a reasonable implied inflation expectation (of around the Bank of England's 2.5 per cent target) within an overall nominal yield of not much more than 5.5 per cent on conventional gilts.

Arguably, however, the apparently higher real yield on US Tips includes a necessary risk premium to allow for tampering with the Consumer Price index. The Boskin Commission declared in 1996 that the CPI has overstated inflation by more than 1 per cent a year and gradual adjustments are under way, to the detriment of future returns on Tips.

The French linker (to be sold across Europe) would give an early indication of market sentiment about future Euroland inflation although the bond will be linked to the French CPI rather than a Europe-wide inflation rate. A true Eurolinker would presumably be based on the Harmonised CPI.

Barry Riley in FT 98-06-24

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Kursnoteringar 98-03-27
Svenska Statens realränteobligationer med förfall
2001 ränta 3,505
2004 ränta 3,518
2008 ränta 3,535
2014 ränta 3,555 procent

Handelsbankens Index-aktie 15 kr, direktavkastning 5,33 procent.





































* vid 75 % marginalskatt

Källa Pia Nilsson Posten

Gunnar Eliasson och Nils Karlsson räknar med sju procents realränta. Detta i sin artikel på DN-Debatt 97-11-19.

"Ett årligt sparande /till ett medborgarkonto/ på 23 000 kr eller drygt 1 900 kr per månad är tillräckligt för att vid sju procents real ränta spara ihop till en miljon kronor på 20 år. ... (Kom ihåg, att värdestegringen för aktier de senaste 25 åren varit högre än sju procent realt per år.)"

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Artikel av Rolf Englund om realräntor och index-papper

Artiklar av Rolf Englund om realräntor och index-papper

Realobligationens plats i långsiktiga investeringsstrategier
Björn Hansson och Mattias Persson
Nationalekonomiska institutionen vid Lunds Universitet Oktober 1997

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Barry Riley: Relationship problems for inflation-indexed bonds

The new inflation-indexed US Treasury bonds, dubbed TIPS, were issued last January as 10-year notes.

I expected a real yield of a little below 3.5 per cent to start with. That proved a fairly accurate prediction, although the recent rise to 3.65 per cent was a little disappointing. the bigger question, however, was how these inflation-proofed bonds would relate to US equities, then yielding 1.9 per cent (and now under 1.7 per cent).

Plainly, one cannot expect the mighty US stock market, capitalised at more than $8,000bn (£4,938bn), to run scared of TIPS worth $15bn. But inflation-proofed bonds ought to fit within a coherent valuation framework taking in fixed interest bonds and equities. The relationships would reflect reasonable expectations for inflation and real dividend growth, balanced by plausible risk premiums.

Real yields are almost identical in the US and UK, at a little more than 3.5 per cent, and conventional long government bond yields happen to be very close right now at 6.9 per cent and 7.1 per cent respectively. Inflation expectations appear to be similar.

But the relationship with equities is different. US equities yield 2 percentage points less than TIPS. This can be rationalised by projecting real dividend growth of, say, 2.5 per cent, in line with long-run economic growth, for a total expected real return on equities of a little more than 4 per cent. This would allow for a small risk premium over TIPS, of about 0.5 per cent. In the UK, however, equities have normally yielded more than linkers, by a typical (though variable) margin of about 0.5 per cent.

This real yield gap notoriously went heavily negative in the summer of 1987 and gave a warning of the stock market crash.

Financial Times 97-05-14

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Sweden's National Debt Office (Riksgäldskontoret) lowered its forecast Monday for the 1997 full year borrowing requirement to a range of 10 billion to 20 billion kronor. The previous forecast was 20 billion to 30 billion kronor... Interest for index-linked bonds picked up somewhat in April, said the office, which added that 5 billion kronor was issued in a loan maturing in 2020.

USA inför realränteobligationer

Appearing at a campaign rally outside Pittsburgh, Clinton promoted the bonds, which guarantee an interest rate above the rate of inflation, as a new and safe way for people to save for college, retirement or buying a home.

``Inflation protection bonds can be a solid rock upon which families build their futures and their dreams,'' Clinton told a boisterous audience at the Robert Morris College. ``Not a penny of value will ever be lost to anyone who buys them because of inflation.''

The bonds, which will first be issued in January, will have a maturity of 10 years and be designed to pay investors an interest rate above the consumer price index, one of the most common measures of inflation.

Regular Treasury bonds offer no such guarantee, so as inflation rises the fixed interest they pay loses its value. The Treasury Department has long studied issuing such securities, which are used by Britain and Canada, and announced on May 16 that it intended to do so as an experiment. It said then that they would be sold in amounts as low as $1,000, putting them within reach of average Americans.

The White House said Wednesday that by January 1998 the Treasury would also start issuing inflation-protected savings bonds in amounts as low as $50, which would make them available to small savers. It also said the administration would propose legislation to eliminate the minimum-age requirement of 24 years for purchasers of education savings bonds and to widen those educational institutions that qualify for them.

The Dole campaign quickly criticized the bond plan, deriding it as a ``new Clinton mini-proposal.'' ``You'd need a microscope and a pair of tweezers to find Bill Clinton's vision for a second term,'' Dole spokeswoman Christina Martin said in a statement. ``Clinton is trying to hide behind an ever-increasing heap of mini-proposals that would expand the size and scope of government one inch at a time.''

While the bonds could certainly be used for all the purposes Clinton outlined, economists typically offered two, quite different, justifications for their use.

The first was that the bonds, when traded, would give policymakers a much clearer read than ordinary bonds on the market's inflation expectations -- a key determinant of inflation.

The second was that if the government was successful in keeping inflation low, over the longer term the bonds were expected to lower the Treasury's cost of financing the U.S. government's debt.

Treasury Secretary Robert Rubin said the strongest argument against the plan was that it would lower resistance against inflation, but the administration decided the fear was groundless and Federal Reserve Chairman Alan Greenspan was ''supportive'' of the plan.

(25 Sep 1996 )

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