More from Fed’s Waller – Markets are concerned on deficits and want a term premium

Federal Reserve Board Governor Christopher Waller spoke earlier:

• Fed’s Waller says he expects disinflation and rate cuts to resume this year

Comments from the Q&A now:

• Market participants are getting concerned about deficits and are demanding a term premium (Waller here addressing 10-year yields)
• the persistence of housing services inflation has been surprising
• does not see much evidence of rising inflation expectations in TIPS and other market measures
• most of the risk in the job market remains towards higher unemployment

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TIPS? What’s he talking about? OK, here you go:

TIPS (Treasury Inflation-Protected Securities) are U.S. government bonds designed to protect investors from inflation. Their principal value adjusts with changes in the Consumer Price Index (CPI), which measures inflation. As inflation rises, the principal amount increases, and interest payments (which are a fixed percentage of the principal) also go up. If inflation falls (deflation), the principal decreases, and so do interest payments.

So, TIPS provide a hedge against inflation since their value rises with it.

• When inflation expectations increase, demand for TIPS tends to rise.
• Conversely, if inflation is expected to be low or stable, traditional Treasury bonds (without inflation protection) might be more attractive due to their higher initial yields.

This article was written by Eamonn Sheridan at www.forexlive.com.