“Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.”
1.) Do you believe that the Chinese and Japanese government are buying treasuries (or holding the junk they have) becuase they believe inflation is low. I don’t.
2.) Cash is being horded in treasuries because of a flight to quality. Investors are making a decision to buy treasuries because they are concerned about losing principal in defaults are via stock market crash not because they think inflation is low. If they can drive
up the price in treasuries in the process more money for them.
3.) There is so much cash sitting around (hmmm wonder where it all comes from) looking for a safe place to be parked I’m surprised the t-bonds and t-bills are yielding any positive interest rate at all.
4.) Even if there were some bond vigilantes that believe that inflation is higher than what the current treasury market reflects do you honestly think they have a friggin prayer in the world of fighting forces 1-3 above? I sure as hech don’t. So instead of shorting treasuries they buy gold, commodities, other currencies and put shorts on the dollar.
My point is that the treasury market (in particular) may not at all reflect current inflation expectations the way it may have in the past. There are many other fundamental forces at work. The bond vigilantes are not dead they are just being heard through other channels.
