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People let's get more now on where interest rates may be headed with you look up fixed income strategist at Janney Montgomery Scott.
Welcome back -- said he.
First take on the consumer prices report this morning -- slightly high prices for the bond market shrugging off a little bit.
As an inflation threat but what about tomorrow the future where we go from here -- how -- inflation factor into the economy.
Well -- We should remain sort of an outside risk he's -- right now outside that sense that not that is extremely unlikely.
But rather in the sense that it's something it's gonna happen in 20122013.
Even -- 2016.
If in fact does -- so it's not really the short term CPI numbers that are really have a concern it's even longer term trends and right now the trends -- inflation in the long term.
A -- and relatively flat the markets are treating it that way as well.
There are people out there who are inflation hawks have been -- from Tom -- a little bit later this hour right.
Who are concerned that inflation may be a bigger threat to our economy we see headlines -- energy prices coming up.
And becoming a distraction for the economy so what happens if that happens before the Federal Reserve is ready to ease off its extraordinary policy right now.
Well I think -- Federal Reserve is behind the ball we have some more significant economic problems and the fact is that inflation can rise faster than even the markets are anticipating.
I -- focus on the idea that this market anticipation.
And we can use traded numbers within the bond markets be able to figure out what the market thinks inflation's going to be over the next ten years.
So what -- you might well right now we're seeing an inflation expectations over the next decade about 2.3 percent.
Which -- a little bit above the Fed's target but in the scheme of things instantly that number includes food and energy.
The scheme of things it's not all that severe -- really see this is more of a long term risk not -- -- the markets all that concerned about in the short term.
A little bit of a lesson of Flores if you will guide where are you -- geese are where are you looking in is it in the treasury yield to -- getting that message that.
You know for what you're describing where -- where the where the market is ahead of inflation.
Well we tracks and they call the tips breakeven that's the president's praise even.
Yes inflation protected securities vs traditional regular fixed coupon treasury securities.
And the difference between these two items because one includes inflation risk the other does not.
Tell us what the market is expecting for inflation.
And I think one point to mention is even though interest rates have risen since the end of December.
These inflation expectations these tips breakevens they really haven't -- actually since probably about mid December so.
Is it telling knowing another metric another monitor perhaps you've got some data today that shows the inflation protected of the inflation hedging ET yes.
All roads today I mean do you read into that at all.
Well I think there's this dichotomy about inflation that's how people think about it vs how it actually happens.
If you take a look at consumer inflation expectations from 1960 onward the price your average big Mac will be somewhere around twelve dollars right now.
So I think there's this perception particularly among consumers that inflation is much greater than the reality kind of bears out.
And in part that's because you see the prices of the gas tank every day you don't focus on the fact that your rent isn't going up on the average.
Because that sort of a long term sort of more stable that -- the market he reconciling.
The fact that.
The US economy is where -- -- with inflation unemployment and the geopolitical risks out there it seems the Egypt revolution has -- a wave of protests and perhaps today there's.
A flight to security going on.
In the US bond market actually what we're seeing a little bit of that and from our perspective the biggest geopolitical risks the problems that -- emerge from Egypt's troubles.
Really have to do with contagion.
You get -- many economies throughout the Middle East in many countries throughout the Middle East that are major trading partners at the US to -- through oil.
And they sort of catch on these protests as well.
The markets to some degree discount that -- Egypt itself.
But now there's evidence -- protests are spreading the entire region.
I think there's going to be a stronger safety bid for the treasury markets over the course the next several weeks at least until his troubles are resolved.
And it's interesting with -- president delivering his 2012 budgets.
This week is there any reaction is there any message in the bond market to back notes that -- criticized for not doing enough not.
Initiating deeper spending cuts in entitlements program are you seeing those bond vigilantes come in yet.
There really wasn't all that much response to be honest -- in the bond markets when this budget was announced I needed pieces of it had been sort of pre implied.
But I think there is one thing that's certain ever since we saw the December tax cut extension expansion deal.
The markets the bond markets have been pricing in expectations of higher treasury supply going out several years not only that -- pricing in greater credit risk to the US treasury market.
So I think if the congress and the president are -- able to get the budget down in a relatively short order in the next several years.
We're facing significantly higher interest rates because -- credit and -- risk not because of inflation but that has not happened -- -- what -- not yet we haven't we haven't seen it emerged certain.
And that's what our keep our eye on for strictly -- Jennie Montgomery Scott it is always great to have you on the show.
By vigilantes I use that term just for our viewers means people who go into the bond market right they -- yields to point that demands government policy to slated to clarify that.
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