Real and Nominal

Everyone knows that an interest rate is made up of a real rate and an inflation factor. The development of a healthy TIPs market and esoterica like inflation swaps have helped isolate the real rate input. The negative real rate structure -and its powerful influence - has been lost in the MSM analysis of credit and asset markets.

Foreign exchange relationships have attempted to reflect forward rate differentials. The extreme movements do not jive with the relatively stable OIS spreads, however. We expect the real rate to be the input to focus on as QE enters a new phase and data points carry more weight. If we are right, there will be collateral volatility in currencies and risk markets. Shiny metals will have their liquidity tested.

Someday, the curve might even flatten bearishly if the data perks up a touch. There's always hope. The process of QE remains intact for another month. The Treasury auctions a TIP today. Hyperbolic rants about debts and deficits centered on nominal prints carry the day. It's time to get REAL.

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