inflation premium

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Inflation Premium

The higher return that investors demand in exchange for investing in a long-term security where inflation has a greater potential to reduce the real return. The inflation premium is the reason that most yield curves trend upward. Thus, a bond with a maturity of 30 years almost always has a higher coupon rate than one with a maturity of 30 days. Investors expect to make a larger nominal return in part to compensate them for the lower real return that is almost inevitable because of the nature of inflation. See also: inflation risk.

inflation premium

The portion of an investment's return that compensates for expected increases in the general price level of goods and services. The expectation of rising inflation results in higher long-term interest rates as lenders and borrowers build in an increased inflation premium.
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In contrast, market measures of long-term expectations showed large declines recently, possibly due to liquidity and inflation premiums among other things.
Firstly, with higher risk and inflation premiums and the expected rate hikes, paying 5Y rates would make sense but carry could make it costly.
Nevertheless, the scope for steepening seems limited given the MENA tensions and the associated short-term risk and inflation premium.
6) As a result, as long as the illiquidity premium and inflation premiums do not shift in systematic ways, future TIPS issuances should be much more cost-effective for the Treasury.
This may be one reason why inflation premiums, embodied in long-term interest rates, are still significant.
Economists, policy makers, and analysts may find it difficult to determine real interest rates and inflation premiums, and it will be difficult to gauge the effectiveness of monetary policy actions.
Should financial markets lose confidence in the integrity of our budget-scoring procedures, the rise in inflation premiums and interest rates could more than offset any statistical difference between so-called static and more dynamic scoring.