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. We still expect a flattening over the medium term.
(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.
At the very least, such securities eliminate the need to estimate inflation premiums. Both New Zealand and the United Kingdom began issuing inflation-adjusted securities during the high-inflation years of the late 1970s and early 1980s, and these securities provided a safe haven for inflation-weary investors.
* plus the inflation premium for an investment horizon of m periods
This study examines whether earnings yields and inflation premiums
are incorporated into long-term stock returns using the data set provided by Renshaw .
This may be one reason why inflation premiums
, embodied in long-term interest rates, are still significant.
Real interest rates-- market rates minus inflation--are comparable to what they were in January 1981, when Jimmy Carter returned to Plains, largely because of the huge inflation premiums
lenders have attached to their rates.
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.
As a consequence, inflation premiums
embodied in long-term interest rates were low and effectively capped.