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A blogger makes an interesting observation. Even though the Federal deficit is heading for all time highs (or is it lows?), long-term bond prices have not moved. Since the Federal, government has to borrow money it doesn’t have to spend it, and deficits are looking pretty big from here on out, one would think bond prices would be dropping like a shot. As interest rates move up, bondholders demand a larger discount to purchase bonds.
But that has not happened. The writer opines, and with some pretty good arguments, that what worries bondholders is not the federal deficit, but inflation. Inflation degrades the bondholders’ earnings. Since inflation looks tame for the foreseeable future, bondholders are content to not ask for large discounts.
Posted by Ted at February 8, 2004 4:53 PM