Tuesday, June 16, 2009

Krugman vs Ferguson

Freakonomics discusses the rise in treasury yields via options on the t-bond. It appears that the increase in yields has more to do with the cutback in deflation risk than the increase in inflation risk in the future.

The graph below plots the probability of different outcomes for the yield on 25-year Treasuries on two different dates — late February and the end of last week. I calculated these probabilities using the technique I discussed in my last post, which extracts the probabilities implied by option prices on those dates. (Wonkish detail: I used the January 2011 options on the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT) and converted bond prices to yields using the portfolio average data reported by iShares.)

No comments: