Flight from Risk

Over at Management R&D, Luke Froeb asks why the yield spread between 5-year Treasury Bonds and 5-year TIPS (inflation-protectred bonds) has declined. In normal times, this spread reflects people's expectations about inflation over the next five years. But these are not normal times. I posted this over there, and thought it belonged here as well:

I think the real story is the dramatic decline in yields on 5-year Treasuries--just in the past MONTH. Given the apparent fear right now of any debt instruments being sold by the private sector, the only place to stash one's cash is in treasuries of one sort or another. And, so

4-week T-bills are down from 1.6% at the end of August to 0.13% today.

1-month T-bills, down from 1.63% to 0.15%.

6-month T-bills, down from 1.92% to 1.12%.

1-year T-bonds down from 2.17% to 1.41%.

2-year: 2.36% to 1.60%.

3-year: 2.6% to 1.86%.

5-year: 3.10% to 2.64%.

7-year: 3.45% to 3.09%.

10-year: 3.83% to 3.63%.

20-year: 4.47% to 4.26%.

30-year: 4.43% to 4.11%.

In general, the shorter the maturity, the greater the (percentage) decline in yield. I read this as a flight from risk, not really as a change in inflation expectations.