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The premium of 10-year Treasury bonds yields over 10-year Treasury Inflation Protected Securities (TIPS) yields has shot to a 15-month high.
That move suggests bond investors are worried about inflation. The spread has widened to more than 2.2 percentage points from zero at the end of last year.
Investors drive up Treasury yields when they are worried that future inflation will eat away at their long-term returns.
The consumer price index actually shrank 1.3 percent in the year through September. But with the U.S. government debt burden and commodity prices shooting higher, many expect inflation to return as the economy rebounds.
Some experts also say the Federal Reserve’s policy of keeping the federal funds rate near zero for a sustained period will spark inflation.
“The Fed has been trying to walk a fine line between supporting the economy and downplaying inflation concerns. . . but the bond market seems to want a more hawkish tone,” Anthony Chan, chief economist for JPMorgan Private Wealth Management, told the Financial Times.
Demand for TIPS is so strong that the amount of them held by Wall Street dealers has slipped to the lowest level in three years, according to the Fed.
But Nobel laureate economist Paul Krugman says there’s less to this story than meets the eye.
The 10-year inflation rate implied by the Treasuries-TIPS spread is only 1.98 percent, he wrote in The New York Times.
Income Security Recommendation December 2011 Issue.
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