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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 29. Bonds: Speculation not Investment[29]

  • To my mind, in principle, government bond valuation is relatively simple. I see the value as the summation of three components: the real yield, expected inflation, and an inflation risk premium. The market tells us that the real yield for 10-year US government bonds is around 2%. Given that the nominal yield is also around 2% at the moment, the market is implying that inflation will be around 0% p.a. over the next 10 years.

  • This suggests that the market believes that the USA will follow the Japanese path into slow grinding deflation. Unravelling the forward curve shows the market expecting 10y bonds to yield 3% in 10 years time! Surveys of long-term expectations show a different picture – they suggest that inflation will be around 2.5% p.a. over the next 10 years. This implies a radically different pricing of bonds. In a normal ...

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