The past week’s performance of the major asset classes is summarized in the chart below - a set of numbers indicating heightened risk aversion on the back of growing concerns about sovereign debt issues, the longevity of the global economic recovery and Chinese policy tightening. The only asset classes to end the week in the black were the U.S. dollar (+1.5%) and Treasury Inflation-Protected Securities (TIPS) (+0.3%).

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Oaktree Capital's Howard Marks recently sent out his Chairman's memo. In it, Marks admits that he is a worrywart but does raise some legitimate concerns. He writes,

the rally in financial markets has outpaced the fundamentals.

I spent some time today updating my Treasury yield curve and inflation model. Anytime a new Treasury note/bond is issued, or we get a new CPI figure, or a coupon payment date passes, the model must be updated. Though I made some technical improvements to the program at the same time, what impressed me was the change in the forward inflation curve since I last wrote on the topic less than a month ago.

The big change is that inflation expectations rise continually out to 2038. Now the TIPS curve only goes out to 2032, so the extrapolation should be discounted. But the last time I wrote, inflation expectations peaked in 2022. That is a significant change. Investors have bid up the prices of long duration TIPS, to the point where I would be skittish about buying the long end of the TIPS curve.