‘Something’ Sure Seems Off

It seemed like an odd, counterintuitive market reaction to what was total chaos. First the news of Lehman Brothers followed closely by AIG, panic gripped every corner of the global marketplace. Toward late September 2008, the stock market would meltdown (the main part of GFC1 that most people associate with the term) in a wave of liquidations due to a global dollar shortage that would last through October 10 in its most acute stage.

During that time, though, bond rates at the long end of the curve moved higher. TIPS yields, too. Was the inflation market trying to say that global and US growth prospects were rising? That would’ve been the literal interpretation of the behavior of “real” yields.

It played hell with inflation expectations. As real rates drove upward much faster than nominal Treasury yields, inflation breakeven points plummeted. That part, at least, sounded like what you would have expected from a crisis – a deflationary event if there ever was one.

There were also differences between maturities; the 5-year TIPS, for example, was much more energetic in its surge of real rates compared to the 10-year. With rising real yields going up at different speeds, as well as differences in the behavior of nominal Treasuries in between, inflation expectations were all over the place.

Long run expectations (the 5-year/5-year forward inflation rate) at first fell and then surged (once the stock market liquidation had ended) before collapsing, skyrocketing, and then collapsing yet again.

During all this, the federal government was initiating TARP and then changing what TARP meant all the while the Federal Reserve was coming up with new “monetary” programs seemingly by the day. No wonder all the confusion, brand new interventions about which most people had no idea what to think. Or believe.

Don’t fight the Fed and the feds?

Well, markets had just melted down so the Greenspan put wasn’t exactly thought of in the most glowing of terms. There was, however, the nontrivial matter of what would come next. Was it inflation and a rapid return to growth, a “V” recovery that seemed to be indicated by long run inflation expectations?

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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