Minute by Minute

On March 16th (following the release of the FOMC statement) I wrote the following:

"To me it sounds as though the Fed may be more concerned with deflation than with inflation."


Today's release of that meetings minutes stated: "Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected." "A number of participants observed that the moderation in price changes was widespread across many categories of spending."


The FOMC members are concerned that inflation is decelerating. That is disinflation. If that persists the result could be deflation. The minutes also reinforced the sentiment that interest rates will remain low for an extended period of time. The bond market shares this sentiment. Today's three-year treasury auction was well received. In fact, it was the most well received three-year auction in months. There was also much interest on the long end of the curve as rates near their highest levels since last June attracted buyers. I would be shocked if tomorrow's 10-year treasury auction was not well received.

An article in today's Wall Street Journal stated the following:

"The bond vigilantes have piled on too early. But that doesn't mean they won't be right in the end."

"Of course, there is no end of good explanations for the yield on the 10-year Treasury note edging above 4% Monday. No one in their right mind would bet on inflation remaining substantially below 4% for the next 10 years."

Here is a fact: The 200+ year U.S. inflation rate is about 3.00%. I will take the bet that over the next 10-years that inflation averages under 4.00%. Could it spike higher from time to time? Absolutely, but unless the Fed loses its independence (possible, but not likely) inflation will not run persistently over 3.00%. According to the FOMC minutes, the Fed's long-term inflation goal (as measured by its favored PCE data) should run between 1.7% and 2.0% during the next. Even if the Fed misses low by 1.5% the 10-year is cheap. If the Fed misses and inflation runs at 2.5%, TIPS are rich at current levels.

It is in vogue (and a bit naive and uniformed) to believe that inflation has to ticks higher and interest rates must trend dramatically higher simply because of the government's borrowing and printing of money. That would be true of the U.S. was the only distressed economy. However, as decoupling was a myth so is the notion that rates must rise.

Other major economies have injected large amounts of stimulus. This includes the China, Japan and the EU. In fact, the aggregate amount of sovereign debt issued by the U.S., EU, China and Japan makes up about 90% of all government debt issued, world wide. Government debt issuance is like fishing with your friend in Alaska when a bear charges. You don't need to be faster than the bear, just faster than your friend. Everything is relative