THURSDAY SEPTEMBER 10, 2009

Inflation or Deflation Threat

The inflationary threat story is well known in the markets.  As the story goes, the U.S. government’s deficit spending and easy monetary policy is out of control.  The overuse of the money printing presses will cause inflation in the long-run. Inflationary pressures will cause the dollar to weaken. Dollar weakness will cause foreign holders of U.S. debt, such as China, to question their desire to hold dollar denominated assets. Interest rates will need to rise to compensate foreign holders such a China for their dollar losses. In the worst case, foreign buyers exit the market.


As prominent as this story is, the bond market seems to be ignoring the inflation threat. This week, the U.S. Treasury issued $28 billion in 3 year notes, $20 billion in 10 year notes and $12 billion in 30 year bonds, a whopping $60 billion in three days.  All of the auctions were well received and the demand exceeded supply by very comfortable levels.  Far from fleeing dollar denominated securities, foreign and domestic investors are snatching up Treasury securities at yields that remain at historically low levels.  The 3 month T-bill yields .14%! The bond market seems to be more worried deflation than inflation.

 

I continue to think the long-term threat of inflation is real. Governments around the world need to develop exit strategies from their easy money policies. If they do not, inflation is inevitable. Just don’t look at the bond market for confirmation.

POSTED AT 1899-12-30 14:33:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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The opinions expressed here do not represent the views of Alliance Financial Corporation and Alliance Bank, N.A. This communication is not an offer or solicitation for the purchase or sale of any security, is for general informational purposes only and does not provide personalized investment advice. When making personal investment decisions you should consult your investment adviser or rely on your own research. Copyright 2008.