Coldwell Banker Premier Realty

Bond Market and Inflation

Anticipating Inflation?
Posted: February 16, 2010 by John McClelland

Seeking Alpha has a good article today regarding bond market expectations of inflation. The author notes that 4.7% yields seem massive in today's low interest rate environment but 30 year bonds are still selling poorly. The weak investor appetite for these bonds implies that market participants are expecting inflation since 4.7% yield in a deflationary market would be supurb.

If this author is correct about inflation expectations, what does that mean for real estate? My take is at these low interest rates, I would not mind owning more real estate, especially income producing. Something that could be expected to rise with inflation but still covers costs like taxes and insurance, with enough left over for that sometimes elusive feature called positive cash flow. If you buy smartly, this can be done. Factor in your purchase price a much higher vacancy rate and lower lease rate and if it covers the note at those levels, there is good chance you have preserved some upside for yourself. As always, there are no certainties and you must do your homework. Nevertheless, opportunities are abundant.
Also note: The Fed's program of buying MBS is near conclusion. Higher mortgage rates could be on the horizon.
Click for the article cited.

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