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Confusion on the 10-year

After Bernanke’s announcement yesterday, I would have assumed the 10-year rate would have fallen, but it’s up to almost 1.90% today.

Does anyone have any thoughts on why it keeps climbing?

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Nominal rates are higher, but real rates have declined. That is, expected inflation has increased. 10-year inflation swap price was 2.64% on 9/12. Right now, it’s 2.80%. This is a pretty ridiculous change. Nominal 10-year swap rates (probably what you are looking at) for the same times were 1.85% to 1.91%. So, real 10-year rates have decreased by about 16 bp (!!). 

Also, real rates are negative…

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It happened last time too actually.

So given that the bond market seems to think that inflation will run around 2.8% over the next decade even after massive monetary easing (and more to come), it would seem that most bond investors are still expecting deflation and stagnation to be the primary concern over the next 10 years.

You want a quote?  Haven’t I written enough already???

There was some decent widening in the 10 year TIPS breakeven.  We’re now at 2.64%…last week we were around 2.45%.  Well above the long term average of ~2.2%

But that’s not the reason, nor should there be any confusion.  This is extremely predictable behavior.  There’s a limited supply of investable money out there.  QEx is crack for stocks….risk on.  Money goes out of treasuries and into the market creating the wealth effect.  Bernanke doesn’t want lower rates.  He wants you to feel good about your 401k.

This reminds me of the US debt downgrade.  There were tons of people that kept saying rates would go up when it was obvious they’d go down…risk off.  Has no one been paying attention the last four years?

The last century has shown to not fight the Fed.  They have more money than all of us in the short run.

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