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September 2014 Capital Markets Monitor and Teleconference
Pricing for Deflation?September 3, 2014 — As the market frame of reference continues to develop, from the Fed “taper tantrum” in May 2013 to Jackson Hole in August 2014, the time remaining before the end of QE3 continues to get shorter—and the prospect of Fed monetary policy tightening clearer.
Nonetheless, 10yr U.S. Treasury yields are down over 65 basis points this year—unwinding more than a third of the taper shock—while yields on other key government bonds continue to decline to record or near-record lows. The only rational explanation for this is that market participants are pricing in the potential for secular stagnation in the major developed economies and the risk of outright deflation in the Euro Area in particular.
Heightened geopolitical tension adds more headwind to growth prospects. In such an environment, monetary accommodation would remain in place for longer—and be accelerated in the case of the ECB— while inflation would be lower. Either or both of these eventualities would justify such low government yields.
Following the publication of the September 2014 Capital Markets Monitor, Hung Tran, IIF Executive Managing Director, and Sonja Gibbs, Director of Capital Markets and Emerging Markets Policy hosted a teleconference on September 4, 2014. The recording of the briefing and the Q & A session is now available for replay.