June 17, 2009

The rising rates are consistent with two different alternatives. A rising inflation rate combined with an increase in inflationary expectations results in higher yields. Another possible reason for higher yields could be an economic recovery. As output increases so will the demand for credit and money. If no supply is forthcoming, the price of credit (interest rates) will rise, while the price of money (i.e. its purchasing power) will also increase. This suggests a lower, not a higher inflation rate. These are vastly different scenarios with quite different potential relative rates of returns.

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