I've been a close observer of the bond market for over 25 years, and it continues to amaze me with its ability to see the future of inflation and real economic growth.
I've been featuring the above chart for a long time, using it to argue that the market was quite pessimistic about the prospects for economic growth. My theory is that real interest rates ought to track the market's expectations for real growth, and indeed they have. Real growth and growth expectations were very strong in the late 1990s, and real yields on TIPS were very high. Since then, the economy has slowed down and real yields have fallen. 5-yr real yields on TIPS have been telling us for the past year that the market was braced for real economic growth to be as low as 1% or so. With today's revision to Q1/14 GDP growth, real growth over the past 2 years has been an anemic 1.4%. In effect, the bond market saw this slump coming a year ago. Needless to say, if the economy's prospects are going to improve going forwa
