In light of recent posts, I thought you would find this fascinating.
I did, though I don’t proport to understand it well.
The author(s) have decades of bond market experience.
esp for you, Wendy
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@jaroman thank you for posting this link which is absolutely on-topic for METAR.
I have never seen this type of analysis before but his conclusion is the same as mine.
“Our reading of bond market messaging is that it is more attractive to hold exposure to long-term interest rates in inflation-protected form, as long-term nominal rates are not offering adequate compensation for the inflation risk inherent in them. If you feel that the probability of US sovereign default in the long term is much lower than that implied in market pricing, then US TIPS might be a doubly good way to hold your long-term interest rate exposure.”
I agree with the first sentence because I think that the market is underestimating the long-term level of inflation. TIPS will yield higher than Treasuries if inflation is higher than predicted.
I hope that the the probability of US sovereign default in the long term is much lower than that implied in market pricing because his calculation is that the cumulative probability of default to the 30-year horizon is about 50%. That is truly a scary thought.
I don’t expect to be alive in 30 years but I would hate to see the U.S. economy crash and burn…which is what would happen if the Treasury bond defaulted.
Wendy
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