Here's the crux of it: Sovereign bond prices and yields across the curve are being driven not by inflation expectations but by the pricing of default risk in the commercial bond markets. As central banks increase liquidity to fight debt deflation as commercial bond default rates rise, inflationary pressures INCREASE even as sovereign bond prices rise and yields fall. We call this the default vs inflation Yield Vise.
At some point, sovereign bond purchasers on the long end of the curve will switch from pricing default risk to pricing inflation risk. If the switch is sudden, if the vice snaps open, long bond prices collapse and yields spike. The triggers are unpredictable, but we are working to identify a few possibilities.
Post those insights that light your candle.
Last edited by FRED; 01-17-08 at 07:47 PM.
Reason: Fixed our spelling.
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