Friday, October 03, 2008

Why are real interest rates rising?

One might have thought that widespread fear in financial markets would cause a flight to quality, driving the price of safe assets up and their yields down. That certainly has been happening with short-term Treasury bills. But look above to see what's been happening to the yield on 5-year inflation-adjusted government bonds. (Click on the graph to enlarge.) If one wants to flee risky assets and invest safely, for many investors these securities are a pretty good place to be. But their yields, rather than falling, have been rising sharply of late. It's a puzzle.

Update: Here.