Dollar Downgrade

Relatively Stable Market-Based Long-Term Inflation Expectations Suggest A Genuine Downshift in Demand

It would be easy to explain what is going on with long-dated US treasuries if it were simply the case that investors were finally waking up to the risk of higher inflation — or least periodic burst of it — in a world of deglobalization and patently unsustainable budget deficits, as for example Afrouzi, Halac, Yared and I discuss in 2024 Brookings paper, a more theoretical companion paper that is on track to be resubmitted to the American Economic Review, and as summarized in a short VoxEU note. In that case, most of the rise of ten and thirty year rates would be reflected in higher LONG-TERM inflation expectations. Yet, that does not seem to be case, at least using the spreads between inflation indexed and non-indexed Treasury bonds. At first glance anyway — and I expect to look more deeply in due time and report on these pages — it really is a shift in demand away from long-dated US debt, a shift that will reinforce the pain of higher long-term real interest rates. The rise over the past couple years has come as no surprise to those of us who think one has to look very long-time periods to distinguish between a genuinely permanent shock as opposed to say, a long-lasting but ultimately temporary shock such as the one that occurred in the wake of the 2008-09 global financial crisis. I never bought into the secular stagnation thesis.