In just the last month, inflation expectations have dropped even further. Markets now expect inflation of less than 2% for the next 30 years according to the Economist, and as shown below there was a marked drop from August to September, even at the long-term end of the curve.
But what’s really important is that the trend of declining expectations has continued. With nominal interest rates unable to go any lower, we’re effectively talking about a steady rise in expected real interest rates.
The chart above is one of the key reasons that 30-year U.S. government bonds yield just 3.91%, and the 10-year just 2.75%. Government bonds are priced for low inflation and no government default.
Meanwhile, gold prices are hitting record highs as gold-minded investors increasingly worry about U.S. government default, hyperinflation, and/or the prospect for high inflation.
Thus one of these two markets will be proven very wrong in the years ahead, since they are betting on opposite long-term outcomes for the U.S.. Even if right now they both seem like ‘safe haven’ investments.
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