Bond Investors’ Price Expectations Lower Than Survey, Fed Says

Bond investors’ expectations for inflation are probably lower than shown in the Survey of Professional Forecasters compiled by the Federal Reserve Bank of Philadelphia, according to researchers at the San Francisco Fed.

The economists reached their conclusion by studying the breakeven rate, or difference in yields between Treasury bonds and Treasury inflation-protected securities, according to a paper released by the San Francisco district bank today. Researchers Jens Christensen and James Gillan then relied on inflation swaps to derive a range for the possible liquidity premium, or how much more investors are willing to pay for protection against the risk that inflation exceeds its anticipated path.

Inflation expectations help guide future policy for Fed officials, who must decide when to withdraw record monetary stimulus. They are scheduled to begin a two-day meeting in Washington tomorrow.

The Survey of Professional Forecasters shows a median projection for inflation, based on the personal consumption expenditures price index, over the next 10 years of 2.3 percent as of May.

“Our model-based estimates of expected inflation suggest that the inflation expectations of bond investors are well below the widely followed survey,” the authors wrote.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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