Is the bond market discounting deflation?
The following chart shows that the yield on the 30-year US Treasury Bond has collapsed over the past few weeks and is now below the bottom of its long-term channel. The chart also makes the point that the recent decline in the T-Bond yield is the steepest of the past 20 years. The recent plunge in the T-Bond yield to only 3.2% prompts the question: is the bond market discounting deflation? Before attempting to answer the above question we’ll put forward another question: what was the oil market discounting when it was pricing oil at more than $140 per barrel just 5 months ago? The reason for asking the second question is to make the point that market prices do not necessarily contain accurate information about the future. In oil’s case either July’s price represented a wildly inaccurate assessment of supply/demand fundamentals or today’s price does, because the supply/demand fundamentals haven’t changed much in the interim. It is true that oil demand has tapered off since July, but it
