In response to the recent drop in the price of energy and other commodities, the amount of inflation embedded in the Treasury's inflation-protected securities has fallen to a two-month low.
The yield spread between the Treasury's 10-year inflation-protected securities and 10-year conventional securities is today at 2.41 percentage points, a basis point lower than yesterday and 20 basis points below this year's high of 2.61 percentage points set on July 3. (A yield spread of 2.41 percentage points means that the market is priced for the consumer price index to increase at a 2.41% pace over the next 10 years.) The July 3 high was the highest since August 2006.
With inflation expectations relatively benign in the bond market, the Federal Reserve's expressed displeasure with recent increases in inflation expectations must be emanating less from Wall Street and more from Main Street, where expectations have soared. For example, the one-year view captured in the Conference Board's confidence survey is for an inflation rate of 7.7%, the most since record-keeping began in 1987.
Federal Reserve officials have implied as much in their recent speeches, and these sentiments were evident in the June 25 FOMC statement, where the Fed referred to "the elevated state of some indicators of inflation expectations." The operative word here is "some," which is a pointed reference to inflation expectations among the general public, not on Wall Street.
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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