June 12, 2007

The combined forecast paints a disturbing picture for the remainder of 2007. The inflation rate and the real economy are both expected to slow down to a less than 2% annual rate by year's end. Jointly these forecasts are at odds with two of the theories going around regarding the rise in yields. Slower growth will ease any capacity constraints issues. The lower inflation also suggests that the price rule is working. That leaves the higher risk premium as the possible explanation for the yield rise.

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