Fischer equation is imprecise: "The precise formula is (1 + nominal interest rate) = (1 + real interest rate) x (1 + inflation rate). Since this formula can be difficult to calculate, a more commonly used formula is i ≈ r +π where i is the nominal interest rate, r is the real interest rate and π is the inflation rate." Source: https://www.reviewecon.com/fisher-formula
This matters in countries where inflation is above about 20% ....
Yes great point. So technically there are some additional smaller parts like real risk or inflation risk premia. However, we are primarily focusing on the US here. I believe I made that qualification. but thank you for commenting this. This will be helpful for people to see.
You said that the US10 BE - US2 BE “was critical in determining the acceleration and deceleration of inflation as it influences nominal yields”. Is there a fundamental reason why this spread reacted before inflation did on numerous occasions? Also what do you use to make these graphs?
Fundamentally, if you decompose the yield curve into its various regimes of bull/bear steepening/flattening then you are able to connect this to inflation because duration has to do with the time value of money. This mechanism exists with or without a central bank.
Why use so many graphs? People find them helpful I think.
Can you please elaborate on “watch SOFR spreads very closely as they relate to both bond prices and nominal yield curves”? Why the sfr6-9 moves inline with Ty?
love this
Very interesting and well explained.
Fischer equation is imprecise: "The precise formula is (1 + nominal interest rate) = (1 + real interest rate) x (1 + inflation rate). Since this formula can be difficult to calculate, a more commonly used formula is i ≈ r +π where i is the nominal interest rate, r is the real interest rate and π is the inflation rate." Source: https://www.reviewecon.com/fisher-formula
This matters in countries where inflation is above about 20% ....
Yes great point. So technically there are some additional smaller parts like real risk or inflation risk premia. However, we are primarily focusing on the US here. I believe I made that qualification. but thank you for commenting this. This will be helpful for people to see.
You said that the US10 BE - US2 BE “was critical in determining the acceleration and deceleration of inflation as it influences nominal yields”. Is there a fundamental reason why this spread reacted before inflation did on numerous occasions? Also what do you use to make these graphs?
Check this out for reference on the attribution analysis.
https://www.capitalflowsresearch.com/p/macro-alpha-webinar-with-prometheus
Fundamentally, if you decompose the yield curve into its various regimes of bull/bear steepening/flattening then you are able to connect this to inflation because duration has to do with the time value of money. This mechanism exists with or without a central bank.
Why use so many graphs? People find them helpful I think.
Oh I meant what do you use to make them? I’d like to have updated ones I can look at daily
Oh lol
Tradingview
Cool, thanks for the info. I appreciate all the additional references as well. Before this post I had no idea how complex it could get lol
Love it !🔥
Can you please elaborate on “watch SOFR spreads very closely as they relate to both bond prices and nominal yield curves”? Why the sfr6-9 moves inline with Ty?
Sofr is pricing Fed funds across various timeframes. How much does this curve impact rates as opposed to breakevens ?
Sofr might be pricing the Fed funds but the nominal curve can price a different path than Fed funds.
You basically need to ask why different paths are priced and what the implication is depending on the specific instrument and what it means.