Inflation expectations are nearing a six-month high, as indicated by Treasury inflation-protected securities (TIPS). The upward trend will make it difficult for the Federal Reserve to meaningfully soften its stance on monetary policy.
Inflation expectations are rising for several reasons, particularly because of continued strength in industrial materials prices (nickel reached a new all-time high this week, for example), new indications of strength in the global economy, particularly in China and Japan, and continued upward pressure on U.S. labor costs.
The yield spread between the Treasury's 10-year inflation-protected securities and conventional 10-year T-notes is currently at 2.42%, just a basis point below the six-month high of 2.43% set on Jan. 31. This indicates that the bond market expects the consumer price index to increase at an annual rate of 2.42% over the next 10 years.
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Tony Crescenzi Blog Inflation Still Sticky 3/16/2007 9:48 AM EDT Higher prices are becoming more evident.
Tony Crescenzi Blog Greenspan Enjoying Post-Fed Life 3/15/2007 3:04 PM EDT The newly natty former chairman still affects the markets when he speaks.
Tony Crescenzi Blog Clarity Builds on Subprime 3/15/2007 12:33 PM EDT Answers to five key questions on the subprime blowup.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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