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Is the market worried about inflation?

There's been some concern about the small rise in rates seen at the recent auctions for Treasury bonds. The worry is that this could mean that the market thinks inflation is around the corner.

Paul Krugman, however, doesn't think there's anything to worry about and produces a convincing graph to prove his case. Steve Waldman is not so sure and counters with a few graphs of his own. Felix Salmon thinks everyone should stop trying to draw firm conclusions from small, short-term squiggles in data best interpreted over the long term. That seems convincing to me.

By Ezra Klein  |  March 29, 2010; 4:42 PM ET
Categories:  Economy  
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Comments

Felix Salmon thinks everyone should stop trying to draw firm conclusions from small, short-term squiggles in data best interpreted over the long term.

Which was, of course, Krugman's point.

Posted by: gedwards1 | March 29, 2010 5:11 PM | Report abuse

gedwards1 for the win.

Posted by: Hopeful9 | March 29, 2010 6:15 PM | Report abuse

I'm going to draw a conclusion from the recent squiggles (well, current levels actually). No. The market is not worried about inflation.

Five year yields are ~2.6% and ten year yields are ~3.9%.

If you assume investors want a real after tax yield of 1.0% annually, and the marginal tax rate for interest income investors face is 35%, the ten year yield implies inflation expectations of 1.5%/yr, and the same analysis suggests an expected inflation rate of 0.7%/yr for the five year. I don't assume reinvestment of coupons, but that wouldn't change the calculations all that much.

Posted by: justin84 | March 29, 2010 7:15 PM | Report abuse

How much of the government's paper have you bought, Klein?

Posted by: msoja | March 29, 2010 9:08 PM | Report abuse

I am shorting with the ETF. $50k in TBF.

Posted by: staticvars | March 29, 2010 11:36 PM | Report abuse

Darts thrown to a board, and none is more convincing than any other.

Posted by: TigerHawk | March 30, 2010 12:30 AM | Report abuse

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