1. Deflation is largely about a decline in economic growth
2. Current talks of global deflation tend to focus on a rise in emerging market debt and a rejection on the part of investors to inexpensively finance more emerging market debt
3. This makes it hard for emerging market economies to grow
4. In turn, commodities have less demand and commodity prices fall
5. Moreover, capital flees emerging markets and seeks the US dollar and US government debt as safety
6. The US dollar and US Treasury bonds rally in deflation
From Bloomberg:
Even with the Federal Reserve reminding
investors that policy makers remain on course to raise interest
rates next year, one corner of the bond market is warning of the
risk of deflation.
The difference in yields between Treasury two-year notes and comparable maturity inflation-indexed securities turned negative yesterday for the first time since the aftermath of the global financial crisis in 2009. The measure, known as the break-even rate, is generally seen as reflecting investors’ expectations for inflation over the life of the securities.
Fed Chair Janet Yellen downplayed the notion at the press
conference after the conclusion of yesterday’s two-day policy
meeting. Falling break-even rates may represent a decline in the
inflation premium risk or the range of inflation outcomes
investors are taking into consideration, she said. One of the
justifications for the Fed to raise rates for the first time
since 2006 is to keep consumer price increases from getting out
of control.
