ly unable to raise prices, and analysts increasingly talk of deflation, not inflation. At the same time, bond prices are getting a lift in a classic case of supply and demand. Nervous investors are fleeing risks in the volatile stock market for the worlds safest investment, treasury bonds only to find the market tightening up, in part to the budget surplus. When the government spends more than it takes in, it has to borrow from the public; however, when it takes in more than it spends, it can retire outstanding bonds. This creates a scarcity in bonds, which drives up the value. Another major reason for the debt becoming more valuable is inflation has been falling. However, this poses no threat because an economy can grow in a robust manner with low inflation. In fact, the U.S. economy has been doing so for the last few years. But slower growth would almost certainly cheer the bond markets further because inflation would be seen as far off. As yields have decline, bond prices, which move in the opposite direction, will soar. Now, is it possible for long term bond rates to fall even farther? Certainly says Brian Westbury, chief economist for Griffin, Kubik, Stevens & Thompson, a Chicago research firm. He points out that in January 1966, with inflation near current levels, the 10 year Treasury was yielding 4.6 %. The average 10 year yield in 1961 was 3.9 %, or 1.6 percentage points lower than it is today. (The 30 year treasury was introduced until 1977.)As it currently stands, the new inflation-indexed securities issued by the Treasury is paying a real interest rate of 3.7 % (7-30-98), plus a variable kicker. (More current rates were unavailable at the time of composition). Compare that with the 5.009 % (12-2-98) on a conventional Treasury bond and you find that the expected inflation rate by investors will average 1.31 % for the next thirty years. Realistic? Doubtful investors should consider "laddering" their bon...
