generally speaking, am I right to say when inflation becomes higher, volatility will be higher, liquidity will be lower? what about treasury yield then? higher inflation means lower treasury yield? higher VIX leads to higher treasury yields?thanks for your explanation, real case would be especially appreciated.

Hi Tiger Bill -I will have a go to get the ball rolling. However it is obviously open to further debate.> when inflation becomes higher, volatility will be higherFor example, during the credit crunch, volatility was at it's highest. Inflation wasn't noticably higher than usual during this time. Unless someone can show some evidence otherwise, the two don't seem highly related?> when inflation becomes higher, liquidity will be lowerDuring the 80s era of high inflation, markets such as equities were far from illiquid. So, not necessarily.> when inflation becomes higher, what about treasury yield then? higher inflation means lower treasury yield?Usually central banks raise interest rates to combat inflation. So you might expect high inflation to be met by increased interest rates and hence higher yields. If you're anticipating inflation to increase ahead of market expectations you may want to short bonds.> higher VIX leads to higher treasury yields?VIX is one measure of volatility. I'm not sure there is a clearly definable relationship here with Treasuries. Sometimes during equity market crash(which must be a time of high volatility) investors may move to the bond market for safety. This may tend to raise bond prices, reducing yields. I wouldn't rely on it though.A book you may find useful is -Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity and Currency Markets (Wiley Finance) - John J. Murphy Hope that helps. Any other takers?

Not quite sure that there is a well-established economic link between inflation and volatility. What is known however is the link between Treasury yields and inflation, via the Fisher (1896) effect. Fisher stated that Nominal Interest Rate = Real Rate + Expected Inflation. The evidence for a Fisher effect is mixed leaning towards poor. However, this is because empirical studies rarely can find good measures of EXPECTED inflation, and typically use actual (which opens the door to possible measurement errors). By the way, expected inflatio also affects the market's earnings yield (inverse P/E). But that's for another time....The VIX T-yield connection is interesting. From my own research, I documented for example that the daily Spearman rank correlation between the 30 year T-yield and the VIX was 0.37 over the period 2004-2007 (prior to crisis) and -0.61 for (2007-2010). One key explanation is that during the crisis the VIX, which is considered to be a fear gauge, took-off while concurrently there was flight-to-safety. This means that investors fled to the 30-year Treasury and bid up its price, which lowered the yield. Hope this helps.Cheers

I think with regards to inflation and Treasury volatility, as with many other things, it has to be unexpected in its appearance at least initially. We have not really faced that in a few decades now in any real way but in the 80s Treasury volatility was very high as the central bank struggled to control inflation and was behind the curve...i have not done rigorous analysis on this but anecdotally you can see similar effects in EM countries where inflation starts to run ahead of central bank policies. It is this factor that can really pick up volatility and lead longer term rate investors to panic - if inflation is within the band the central bank is comfortable with or if it is felt the central bank has the necessary will and tools to control inflation then it is unlikely to cause higher rate volatilitywith regards to this post from earlier:For example, during the credit crunch, volatility was at it's highest. Inflation wasn't noticably higher than usual during this time. Unless someone can show some evidence otherwise, the two don't seem highly related?...yes while volatility was highest during credit crunch and inflation was non-existent, its not to say lack of inflation means no volatility. in fact credit crunch brought out fears of 0 liquidity and massive deflation (inflation either very +ve or -ve can be v destabilizing), but the credit crunch experience only tells us that volatility can happen even in non-inflation periods, but nothign about what happens with inflation