Lighthouse Investment Management
Weekly Chart Window - August 19, 2013 Page 3
TIPS-derived Inflation Expectations
Inflation expectations are calculated by subtracting real (TIPS) yields from nominal yields
Inflation expectations continue to rise
The Fed prefers elevated inflation expectations in order to motivate consumers to spend and todeflate the real value of debt. A slowing velocity of money counters the Fed's efforts.
Recent talk from Bernanke about possible 'tapering' of QE later in 2013 led to doubts regarding theFed's policy of N-GDP targeting, only adopted in late 2012.
CONCLUSION: Global central banks are the only buyers of Treasury bonds with 5yr+ maturity left inthe market. Despite the Fed absorbing more than 100% of net issuance of 10yr+ maturities, yieldscontinue to rise (from 1.65 to 2.85%). If the Fed concludes it has lost control over yields, there areonly two options: increase QE (instead of 'tapering') or announce a yield cap (Fed commits topurchase every T-bond until yield drop below a certain level).