Tags: yield premium | Treasuries | TIPS | inflation

Treasury Tea Leaves Hint of Inflation Ahead

By Dan Weil   |   Wednesday, 23 Dec 2009 01:24 PM

The yield premium of Treasury bonds over Treasury inflation-protected securities (TIPS) has reached a 16-month high, signaling inflation ahead.

The yield premium for 10-year Treasuries over 10-year TIPS closed above 2.25 percentage points four times last week, the longest streak since August 2008, Bloomberg reports.

That spread indicates that 10-year Treasury yields, now 3.63 percent, may be headed higher.

“It could be an environment where we see 4 percent on 10-year yields, which we think is likely in the near term,” Carl Lantz, an interest-rate strategist Credit Suisse, told Bloomberg.

TIPS have returned 11 percent so far this year, according to Merrill Lynch. And that shows investors are worried about inflation.

“A lot of people are investing in the asset class viewing that with the amount of liquidity that the Fed has provided the market, and the devaluation of the dollar, that inflation’s inevitable somewhere down the road,” Todd White, who oversees government bond trading at RiverSource Investments, told Bloomberg.

Meanwhile, Treasuries will almost certainly produce a negative return for the first time in 10 years. They are down 2.4 percent so far this year including reinvested interest, according to Merrill Lynch.

To be sure, the recent news that “core” consumer prices, which exclude food and energy, were unchanged in November from October quelled some inflation worries.

“The downward pressure on core inflation continues,” Ian Shepherdson, chief US economist at High Frequency Economics, told the Financial Times.

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The yield premium of Treasury bonds over Treasury inflation-protected securities (TIPS) has reached a 16-month high, signaling inflation ahead. The yield premium for 10-year Treasuries over 10-year TIPS closed above 2.25 percentage points four times last week, the longest...
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2009-24-23
 

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