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Feb 16

Inflation Expectations

Fixed versus Inflation Linked Government Bonds – Sep 2010 The above chart shows the yields of 2 different types of government issued bonds…Fixed Rate and Inflation Linked. Given they both have the same maturity, September 2010, the difference in the yields must therefore represent the market’s expectations of inflation.
As the chart demonstrates, the yields on both bond types has converged since the start of 2008. The difference in the yields have gone from around 3% to 4% down to its current difference of only1%. So whilst inflation was running at around 3.7% over the last 12 months, the expectations over the next 18 months is only1%…so whilst many regard ter deposit rates of 4% to 5% as low, on an after-inflation basis maybe they’re not so low after all.

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