News Column

What to watch

July 9, 2014

By John Waggoner, @johnwaggoner, USA TODAY

You may not think inflation is dead, especially if you've bought food or gas recently. But the bond market thinks inflation is deader than a coffin nail, and if you're an investor, the bond market's opinion is the only one that counts.

Shortly after the Federal Reserve released the minutes of its Open Market Committee, 10-year bond yields plummeted, closing at 2.55% Wednesday, down from 2.61% Tuesday and 3.03% at the end of 2013.

Inflation is to the bond market what kryptonite is to Superman. People buy bonds for their interest payments. If your bond pays $100 in interest every year, inflation will erode the value of your payments. When inflation looks likely, bond traders demand lower prices and higher yields.

But when bond traders aren't worried about inflation, they accept lower yields and push prices higher. When the Fed's minutes were released, the 10-year T-note yield fell faster than the price of a soccer ball signed by the Brazilian soccer team. The reason: The nation's central bankers remain unconcerned about inflation as long as wages remain stagnant. You can't have a wage-price spiral without rising wages.

You may be convinced that inflation is rising, but in the investment world, the only opinion that counts is the bond market's. And if you bet against bonds, you're in a world of hurt. The ProShares Short 20+ Year Treasury ETF, which bets against falling interest rates, has fallen 12.4% this year. In investing, being too early means being wrong.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: USA Today

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