Since last autumn, the government has flooded the financial system with hundreds of billions of dollars in efforts to prop up an economy battered by the housing crisis and ensuing credit crunch.
Analysts expect the government could ring up $8 trillion in debt to fund a near $900 billion stimulus package and other efforts to revive lending, job growth and business spending.
There is no consensus whether all these steps are needed, but investors generally agree the money government intends to borrow will become inflationary once the economy recovers.
"All the liquidity in the system will have an inflationary impact," said Tom Girard, who manages the $805 million MainStay Balanced Fund in New York.
In contrast to data showing falling prices, the TIPS market suggests a reemergence of inflation expectations, which were nearly nonexistent at the end of last year.
The break-even rate between 10-year TIPS and regular Treasuries, a market gauge on long-term inflation, has rebounded to 1.05 percentage points midday Thursday after it fell close to zero in November.
Other market gauges like a steepening yield curve suggest inflation is not as far off as some investors think.
Still, some market observers counter that a modest recovery in inflation expectations is inevitable, noting they still hover near historic low levels.
And they argue that TIPS are not the most effective hedge against inflation, which will not be worrisome until 2010 at the earliest anyway.
An exchange traded fund benchmarked against a basket of commodities including oil and gold could eventually fare better as an inflation hedge than TIPS, they said. These ETFs include those that track the Goldman Sachs commodity index GSG.P and the Dow Jones-AIG commodity index (DJP.P).
"It's a good, if not a better, place to invest," said Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida.
Like TIPS, commodities will be a long-term play, Richman added.
Oil, gold and commodities have recovered from a beating in the second half of last year when the economy soured, but remain far below their record highs.
The Reuters-Jefferies CRB index .CRB, a global index on a basket of 19 commodities, fell 4.1 percent in January, the smallest monthly decline since June 2008.
On the other hand, TIPS are already earning money for investors. The Barclays Capital total return index on TIPS is up about 1.74 percent so far this year, compared with 2.88 percent drop on its index on regular U.S. government bonds.
Investors still appear timid about jumping into TIPS. Last month, the government's $8 billion auction of 20-year TIPS fetched tepid demand.
(Editing by Leslie Adler)
