Tuesday, January 06, 2009

Time to Buy Inflation Indexed Bonds?

If you think some inflation will start soon, what asset should you buy? Gold is too heavy. Inflation Indexed Bonds offer some rate of return.

If the Obama Administration foresees years of trillion dollar debts, how will the U.S pay off these IOUs? Raise taxes sharply on future generations? Entice China and Sovereign Wealth Funds to buy up our bonds forever? An alternative is to inflate this debt away. If future US Fed Chairs believe that international investors do not have credible alternatives to invest in then the U.S could get away with this. Alternatively, if globalization leads to a "level playing field" such that the U.S is no longer viewed as the only "safe haven" for investing then the U.S would be punished for defaulting on its current debt by inflating away.

In searching for some material on the benefits of inflation adjusted bonds, I found this nice short piece

http://www.frbsf.org/publications/economics/letter/1995/el1995-32.pdf

2 comments :

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