The Battle for Capital of US Equities and Bond Yields

1722 Words Feb 19th, 2018 7 Pages
The Fed’s adoption of quantitative easing was partly aimed at alleviating upward pressure on real interest rates due to declining inflationary expectations. Hitherto, the prospect of rising inflationary expectations has, for the most part, not been a major concern for either the Fed or investors. This may now be changing with the apparent breaking down of the condition known as “Gibson’s Paradox.”
Gibson’s Paradox originally referred to the positive relationship between interest rates and the general price level outlined by Alfred Gibson in The Banker magazine (1923). Gibson’s findings ran counter to the general prevailing views amongst economists, with the notable exception of John Maynard Keynes. Subsequent empirical work by Keynes showed no relationship between the level of interest rates and the rate of change in prices. The concept of Gibson’s Paradox has been applied to explain periods of financial history where equity prices and bond yields have displayed a positive correlation. Since 1997, the correlation between US equity prices and bond yields has been positive, largely reflecting a deflationary economic backdrop. Gibson’s Paradox exhibited signs of breaking down in 2013. The correlation between US equity prices and bond yields has now gone negative. Does this indicate…
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