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If You Think Bonds Are a Conservative Investment, Think Again
Bond investors beware of deflation's impact on yields
By Bob Stokes
Wed, 29 Aug 2012 16:45:00 ET
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When it comes to the direction of prices in the economy, inflation has been the default worry for decades. 

But several years ago, Bob Prechter's bestseller Conquer the Crash argued that the economy was set to contract.
 
The book said credit demand would dramatically slow and bond yields would fall.
 
That's exactly what happened.
 
Read this excerpt from a June 2012 Elliott Wave Theorist Special Report:
 
Our long term outlook for interest rates on U.S. Treasury securities has been a contrary opinion for many years. Most commentators have been expecting either economic expansion or Fed-induced inflation to push bond yields higher. Conquer the Crash predicted that long term rates on AAA-rated bonds would fall much further as the monetary environment shifted from lessening inflation to outright deflation. Figure 1 shows the forecast from 2002, and Figure 2 updates the graph to the present. 
 
 
The Theorist Special Report also observed:
 
In line with our forecast, the interest rate on the Treasury’s 10-year note has just plunged to the lowest level in U.S. history. The decline from 1981 to the present is a stunning 91%.
 
Those predicting economic expansion or hyperinflation have been unable to explain this persistent plunge.
 
Yet even now only a few people expect deflation, despite the growing signs.
 
About a third of the items in the shopping basket that makes up the Consumer Price Index fell in price in [July], up by more than half from earlier this year. While capacity utilization is now at an almost-normal 79 percent, the evidence today shows companies have little, if any, pricing power. [emphasis added]
 
Reuters, August 15
 
That's just a sample of the evidence that the economy is in the early stages of a deflationary trend.
 
EWI believes that economic contraction is set to accelerate.
 
What does deflation mean for bond yields in the months ahead?
 

Tags: Bob Prechter, deflation, economic depression, economic indicators, Elliott wave, inflation, Treasury bills (T-bills), Treasury bonds, treasury yields, U.S. Treasuries
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