Tags: fed | bernanke | us | economy | Economist | Beat | Inflation

Economist: Beat Inflation by Dumping Bonds

Friday, 29 Apr 2011 08:28 AM

John Cochrane, professor of finance at the University of Chicago, says investors should dump long-term bonds in the face of inflation.

"The U.S. can always avoid technical default by printing money to pay off debt and fund extra spending," Cochrane writes in The Wall Street Journal.

“But being paid back in worthless money is the same as not being paid back at all," which is precisely why he is estimating the 2025 budget is so important today.

"To buy a 30-year Treasury at its current 4.5 percent yield and get a decent 2 percent return, you have to bet that inflation will not exceed 2.5 percent for the next 30 years," Cochrane observes.

"You have to bet they will solve the 2025 deficit."

bernanke200.jpg
Fed Chair Ben Bernanke
(Getty Images photo)
If you decide that the government will just keep kicking the deficit can down the road, sell your 30-year Treasurys, advises Cochrane.

“Sell fast, before everyone else does — because if we all try to sell, we just drive down the price and long-term interest rates rise," he says. "So as long as we don't solve 2025, we are at risk of a spike in long-term rates if investors dump long-term U.S. debt."

Reuters reports that U.S. Treasurys fell following Federal Reserve Chairman Ben Bernanke’s press conference, as profit-taking and selling to make room for upcoming seven-year supply overshadowed the Fed's pledge to hold short-term interest rates near zero.

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John Cochrane, professor of finance at the University of Chicago, says investors should dump long-term bonds in the face of inflation. The U.S. can always avoid technical default by printing money to pay off debt and fund extra spending, Cochrane writes in The Wall...
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2011-28-29
Friday, 29 Apr 2011 08:28 AM
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