Cause of inflation and term premium

[sharadkapoor]

Hi guys,

Quoted:
When inflation is caused by strong aggregate demand, nominal bond returns are negatively correlated with growth, corresponding to lower term premiums.

When inflation is caused by strong aggregate supply, nominal bond returns are positively correlated with growth, corresponding to higher term premiums.

Can somebody please explain what these statements mean - why does this relationship exist - and if an example could be given to substantiate?

Regards,

[Harrogath]

Hello,

I think I made a detailed explanation regarding your questions in the post linked below. Not as straightforward as it may seems, however.

Growth, Inflation & Bond Yields

The below fact is stated in both readings 10 and 11 of the CFAI text. Why is this? Does someone understand it enough to give a practical example? What is a demand/supply driver? When growth and inflation are primarily driven by aggregate demand, nominal bond returns tend to be negatively correlated with growth. When driven by aggregate supply, nominal bond returns are positively correlated. Thanks