I’m stuck with exhibit 26.
I was actually under the impression that interest rates and bond yields must move in tandem. So, for example if inflation is expected to rise, interest will be expected to rise to cool down economic activity, and the YTM on bonds will rise concurrently (and hence bond prices fall).
Now, exhibit 26 suggest the opposite. As Inflation is expected to rise, bond yields are falling.
Where is my mistake?
If the table below is the exhibit which you are referring to, I believe the key word is REAL. Inflation errodes real returns.
Exhibit 26. The Macroeconomy and Real Yields
Economic Observation** Effect on Real Bond Yields**
Economic growth rising (falling) Rise (fall)
Inflation expectations rising (falling) Fall (rise)
Investor demand rising (falling) Fall (rise)
Its more subtle than that. If you use real-nominal yields to predict inflation then you generally overshoot. Otherwise for real yields no change should be expected
Dude it’s OCTOBER. Just grab a beer and chill.
Some people are more dedicated to ensuring that they pass the exam than others are.
thanks s20000
this kind of question is a real concern for me. in L2 there were no end of ‘double adjustment’ problems. I’m sure L3 will be no different, and catching a “simple” real vs nominal trick will not get you the charter.
not only that, but I have to justify why there is a difference. And the reason must match the “cfa way” with the same keywords which exist in the cribsheet.
AND turn it into a sentence, AND do it in three minutes.
there are three reasons given in the preceeding paragraph, but I think the missing link is that inflation rises generally because of a strong economy. If this is the case then interest rates will generally be high to stem inflation, meaning real yields on TIPS will be high to begin with.