Stagflation has bond market in quandary

Globe and Mail | May. 26, 2008 (News Report)

Investors in U.S. Treasuries are in a quandary, with inflation pressures on the rise at the same time as the economy is just crawling along. In a word, the problem is "stagflation." ... The yield on five-year U.S. Treasuries climbed 11 basis points during the first four days of the week as energy prices climbed ever higher, before dropping back eight points on Friday to end the week with a yield of 3.14 per cent. (A basis point is 1/100th of a percentage ... Full Story »

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by Stephen Pizzo - Oct. 1, 2008

We haven't experienced it since the late 1970's/early 1980's: Stagflation. It's the worst of inflation and recession combined. But we are about to experience it again. Soaring prices combined with sluggish business/job conditions. Interest rates, currently being forced down by the Fed to combat the housing crisis, will soar as well, putting more homeowners deeper in trouble. Once stagflation sets in the only way to combat it is for the Fed to switch to battling inflation. And the only way the Fed has to do that is to jack up interest rates. It's a formula that calls for pain before there can be any gain.

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