cicerone imposter wrote:
High Seas, It's expected that inflation will catch up with us sooner or later, and any fixed projections on bond rates cannot anticipate what will really happen - whether on the low or high side. Averaging sounds good, but who knows what bond rates will be five years from now?
There's no "averaging" involved, even with yield curve that's completely flat, because each payment made to the bondholders during the life of the bond gets discounted to the present at a different discount factor.
Currently the yield curve is the steepest it's ever been in the entire history of the United States, with some short-term rates falling even below zero:
As to expected inflation rates, they can be seen on the yield curve itself, then calculated as "implied" rates for intermediate maturities (i.e. year 1, year 2, year 3 etc are visible on the curve itself, but years 2 to 3, 3 to 4 etc have to be calculated). This means that the difference between rates on TIPS (Treasury inflation-protected securities) and nominal bonds for equal maturities can NEVER be equal to the expected inflation rate, even with a flat yield curve, except by some extraordinary mathematical fluke (hasn't happened yet, but it's theoretically possible).
That's why these weird posts on "averaging" and on "implied inflation rate" are "not even wrong"