New Way to Predict Inflation Expectations (DB)

Deutsche Bank AG (NYSE: DB) has announced a new methodology of predicting inflation.  How well it works is anyone’s guess, but the international banking giant is launching the DB Market-Implied US Inflation Rate Index.

This is said to be the first such index offering investors an implied overall measure of inflation expectations.  The methodology takes into consideration yield spreads between U.S. TIPS (Treasury Inflation-Protected Securities) and nominal yields on U.S. Treasury securities.  

The index can be tracked and measured on Bloomberg terminals and the Bloomberg.com site under the ticker “DBLNBEY.”

As of January 13, 2012, the index is forecasting future overall inflation of 1.91% per annum. 

Sadly, this means that at 1.87% yield on the 10-Year on-the-run Treasury Note investors are actually losing four basis-points per year for the next ten years for that safety premium.  That assumes that inflation never rises either.  It should be noted that Ben Bernanke and friends at the FOMC have pledged to keep rates unusually and exceptionally low through at least mid-2013.  After that, everyone is on their own.  It should also be noted that there is no social contract that if things were to change that the FOMC could not adjust its policy intentions.

JON C. OGG