Friday, May 12, 2006

SP500 vs Tips and Inflation



The Chart shows S&P versis 10y Tips zero rate and the breakeven inflation implied. The risk premium according to TIPS decline with S&P in 2001-2003. Since 2003, S&P rally, breakeven inflation jumped from average 1.5-2.5% to 2.5-3% while the risk premium staying low. Even though the nominal rates has increased with this rally in Equities, the risk premium has only just picked up. This might hurt the stock market.

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