Topsy turvy world for bond market and Fed

In an article today on a Bond Frenzy the NY Times notes that the bond market snapped up inflation linked 5 year Treasuries with a negative yield. “Investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money,” the NYT said.  Why would investors snap these up? They have a rider that will put them in the money if inflation rises above 1.58%. With QE2 coming soon the bond market is betting that the Fed will be successful at reigniting inflation. Weird position for the Fed and Bond market to be in. Especially noting that the issue was 2.8 times over subscribed and 40% of the interest was from overseas.

1. The Fed is trying to push inflation up.

2. Overseas investors (of some stripe) bet on the dollar weakening. Which will help US exports presumably and lower imports from overseas.

But also these bonds are a hedge against and a (bet on) the risk of deflation of more than 5.5% in five years. Both positions show how inverted the current situation has become.

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