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Inflation And Bonds

September 08, 2022

Initially the Federal Reserve (Fed) was of the opinion that inflation was transitory. They have now switched their viewpoint resulting in ongoing increases in interest rates.

We’re still not sure anyone knows for sure. It is more likely different areas of the economy may have transitory inflation while others will not.

This is not just a U.S. phenomenon. Inflation is global. According to the U.N., the expected global inflation for calendar year 2022 is forecast as 6.7%.

In the past, Treasury bonds would usually pay 1-2% above inflation. At the moment, it isn’t even close. The 10-year Treasury is paying in the neighborhood of 2.88% at the time of this writing, yet inflation is running at 8.5% for the 12 months ending in July (U.S. Labor Department).

Whether this discrepancy is a temporary blip, we don’t know. We don’t believe bonds are purchased to “make money” but rather to serve as a cushion when stocks decline. While this has not been true in 2022, it has in previous years.

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