Using Treasury Bond Yields to Check in on Inflation!

Every once and a while I like to check in on the market’s inflation predictions.  This is for my own personal curiosity, and possibly to entertain you, dear reader.  You’ll be interested to know that inflation expectations have tempered somewhat over the last few weeks; it all goes to show that throughout all of the howling on raising debt ceilings and mudslinging in politics, the market still believes in the general stability of the United States dollar.  My method is the classic “subtract real treasury yields from the yield curve rates”.  All information is available at the U.S. Treasury’s web site.

Inflation Expectations, 5, 7, 10, 20 Years Out

Expected Inflation, 2010 (US Treasury)

Note that the bond market was predicting less inflation at the end of January, but inflation expectations have started to creep up again.  The graph shows the expected annual geometric mean of inflation, meaning that the market is predicting that the next 20 years will have a geometric mean of 2.53% inflation.  Put another way, the market expects that something that costs $1.00 today will cost $1.65 in 20 years.  Speaking of the yield curve, take a look at how it looks currently:

Treasury Yield Curve for 2/3/2010 (US Treasury)

This is a healthy yield curve; progressive maturities yield a greater amount.  Flatter (or non-rising!) yield curves portend a slowdown of economic activity.  This yield curve suggests relatively smooth sailing.  For your viewing pleasure, I present a yield curve I’ve shared before, from January 2, 2008:

Treasury Yield Curve, 1/2/08 (US Treasury)

We all know how that turned out!

Anyway, our current curve is healthy, and using this method to predict inflation suggests rather low inflation for the foreseeable future.  What are your predictions?  Let me know in the comments!


  1. says

    I don’t trust the inflation statistics from the Treasury Department or the Fed. I think they have an incentive to underestimate the rate of inflation, based on the trillions of dollars of bonds and the COLAs for Social Security and welfare.

    They have purposely changed the way they calculate inflation to reduce the number. For example, the 4% rate projected in 2008 would have been well over 10% if calculated the same way they did up until the 80s.

    I think the real rate of inflation is much closer to 5% than the 2% they have been claiming.
    .-= Bret @ Hope to Prosper´s last blog ..Investing in a Shaky Market =-.

  2. says

    Absolutely true, not to mention that lower inflation means that the securities this data is based on, “TIPS”, is worth less. Maybe the article is better titled, “Checking In On What The Market Believes The Government Will Report Inflation As” ?