Cause of inflation and term premium

Hi guys,

Quoted:
When inflation is caused by strong aggregate demand, nominal bond returns are negatively correlated with growth, corresponding to lower term premiums.

When inflation is caused by strong aggregate supply, nominal bond returns are positively correlated with growth, corresponding to higher term premiums.

Can somebody please explain what these statements mean - why does this relationship exist - and if an example could be given to substantiate?

Regards,

1 Like

Hello,

I think I made a detailed explanation regarding your questions in the post linked below. Not as straightforward as it may seems, however.