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MBS Day Ahead: Wholesale Inflation Still a Supporting Actor For Bonds

Posted To: MBS Commentary

Inflation is one of the basic building blocks of bond yields. A bond is a loan… an agreement for you to give me a lump sum of cash today and for me to pay you back with periodic installments over time. If inflation means dollars have less buying power in the future, more inflation means those future installment payments are relatively less valuable. If that makes great sense to you, skip to next heading a few paragraphs down. If not, here's an example to bring it home: Let's say you need a loan for $1200. I'm going to give you the cash and you're going to make 12 monthly payments of $100 each (0% interest, because I love you that much!). I will use each $100 payment to pay my water bill. But if your water bill is anything like mine, you know that $100 is going to go up–i…(read more)

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