SHORT U.S. BONDS [10-year and 30-year] (Timeframe for idea: immediate as well as longer-term trend):

While there appears to be consensus among Fed governors that inflation will moderate in the second half due to slower economic growth, the history of inflationary periods suggests that inflation ends only when interest rates rise.

Worldwide, interest rates remain at highly stimulative levels relative to price appreciation, especially when data is normalized by taking out hedonics and substitution, and when considering a prolonged period of disinflation brought on by the globalization of labor may be coming to an end. In addition, government spending, especially in the U.S., is further stimulative and becoming more so. Clearly in the U.S., overconsumption is a problem, which the market is trying to correct, but the Fed and government are trying to ameliorate via stimulative measures. As recent market action has shown, such stimulative measures are as likely to create more inflationary pressures as they are to alleviate banking and housing problems. Inflation expectations are becoming more entrenched and early evidence hints at inflation's extension beyond commodities.

Should the Fed's (and to some extent the market's) consensus opinion of moderating inflation prove incorrect, the "flight to safety" into U.S. bonds could turn into a "flight of panic" out of U.S. bonds.

As a final point, the "reduced demand" argument for moderating inflation is an oversimplified model of stagflation. Price increases CAN occur when demand is falling if supply is falling faster. What is not obvious about stagflation is that malinvestment can cause suppliers to pull productive capability faster than demand is being destroyed. A recent example would be the airline industry, where rising fuel costs and moderate demand are forcing many airlines into bankruptcies and others to pull less efficient aircraft from service, all of which allows for fare increases during a period of slowness.