Nothing Sinister in Inflation Puzzle; Bonds Are the Mystery

  • Yields persistently at depressed levels make the least sense
  • Those seeing inflation as structural see positives in that

While the academic elite ponder whether inflation’s tepid pace will prove transitory or signals long-lasting structural changes, some investors say the real mystery is persistently low bond yields.

Federal Reserve Chair Janet Yellen -- who has long said transitory forces were weighing down inflation even as labor slack diminishes -- acknowledged last month it was a “mystery,” yet didn’t abandon her premises. That goes against the view touted by Claudio Borio of the Bank for International Settlements, who says globalization and technological advancements have made inflation structurally lower.

“If you think about bond yields -- just the traditional sovereign 10-year -- they themselves don’t make much sense,” said Stephen Jen, the London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. and a former economist at the International Monetary Fund, World Bank and Federal Reserve.  

“Inflation, it’s not a mystery to people like Borio, or myself, because it’s structural,” added Jen, who studied under Nobel laureate Paul Krugman and the late economist Rudiger Dornbusch while pursuing a doctorate in economics at Massachusetts Institute of Technology. “And with this structural view, then some of the disinflationary pressures are positive, in other words, that inflation being low does not imply something sinister around the corner.”

“You have had equity markets rallying, inflation is lower than expected, but it’s not low, GDP growth is very healthy -- not just in the U.S. but elsewhere -- unemployment is lower than last year,” said Jen. “And yields are here? That’s the conundrum.”

— With assistance by Brendan Walsh

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