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May 29, 2008

Bond market starts to take inflation seriouisly

The bond market, which has inexplicably been absent from the inflation discussion, is starting to weigh in. Bond investors are supposed to push up long-term interest rates when inflation threatens, because inflation threatens the real return from their coupons. (If you earn 5 percent on a bond and inflation is 6 percent, you just lost 1 percent of your buying power.) But bond yields have been weirdly low this spring even as inflation makes its strongest bid since the 1980s. Now that's starting to change.

The yield on the 10-year Treasury is back up over 4 percent. Perhaps bond jocks were responding to yesterday's news that Dow Chemical would raise prices by as much as 20 percent. For years inflation doves have been reassured by the "core" inflation rate, which measures inflation everywhere except for food and energy prices. The core rate has been relatively tame. Memo to inflation doves: Chemical prices are part of the core. Get ready for an uptick.

Posted by Jay Hancock at 9:56 AM | | Comments (0)
        

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Wednesdays and Fridays.
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