Inflation on the rise? Market says not so much
Options traders push out Treasury market sell off expectations
October 1, 2012 10:08 am ET
Bill Gross, who runs the world's biggest bond fund, says the Federal Reserve's open-ended plan to flood the economy with $40 billion a month will ignite inflation. The options market is signaling that won't happen anytime soon.
Demand to protect against higher long-term bond yields over the next six months has been static since Fed Chairman Ben S. Bernanke announced a third round of quantitative easing, or QE3, Sept. 13, Barclays Plc data shows. Appetite, though, is rising for options that mature in 2015. Traders' expectations for consumer price increases as measured by inflation-protected Treasuries have fallen from highest levels since 2006.
The market measures show tame inflation is giving Bernanke time to nurse the economy back from the depths of the worst financial crisis since the Great Depression without pressure to withdraw stimulus just as $1.2 trillion in mandated fiscal spending cuts and tax increases start Jan. 1. Consumer prices are in check though the Fed pumped $2.3 trillion into the economy through QE bond purchases since 2008.
The market is not suggesting there's any kind of runaway inflation in the next one or two years given the below trend growth trajectory and the impending fiscal cliff, said Gemma Wright-Casparius, who manages the $43.9 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc.