Does the bond market shows low inflation expectations?
Bond prices reflect future inflation expectations. Yields move in the opposite direction of prices, so as bond prices increase, yields drop. Recently, the Federal Reserve and Treasury have spent billions of dollars purchasing bond related instruments, including mortgage related securities, with the hope of keeping interest rates low. Low interest rates help borrowers by reducing the costs of home loans, car loans, etc. However recent drops in bond prices (5, 10 year bonds) show an increase in inflation expectations because of this rapid increase in liquidity. Ultimately there is no free lunch and as the Treasury prints money to battle the current downturn, there is growing concern that these huge increases in liquidity (very easy availability of money) will trigger large increases of inflation in the future.
