Friday, March 27, 2009

Deflation Threat Subsides

                                                      Click on the pic to enlarge it.

The blue curve is the yield on an inflation-adjusted bond and the red one is the yield on a nominal bond of approximately the same time-to-maturity. The negative inflation compensation that showed up a few months earlier (when the blue line was well above the red) has shrunk to about zero. These relative yields are moving back toward a more normal, and healthier, alignment. This should give Ben Bernanke some sleep.

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