Treasury Bulls Battle Bernanke's Hawks

The Treasury market has been out of sync with the Federal Reserve for months now, with bond traders seemingly obsessed with growth stats even as the Fed continues to stress the importance of inflation. This curious divergence was evident again Tuesday, while the stock market avoided taking sides.

Chairman Bernanke said twice in his speech Tuesday that inflation is "uncomfortably high," and he said twice that the risks to his inflation forecast "seem primarily to the upside."

Even after a much weaker-than-expected durable goods report, Bernanke (and other Fed speakers) was much more sanguine in his comments on growth, painting a relatively rosy picture of the economy. He noted the steep decline in home prices and rise in inventories, but -- on the day existing-home sales had their first upturn since February -- added that the market shows signs of stability.

Furthermore, "outside of the housing and motor-vehicle sectors, economic activity has, on balance, been expanding at a solid pace," Bernanke said, while predicting that the economy in the coming year will "return to a rate that is roughly in line with the growth rate of the economy's underlying productive capacity."

When the durable-goods number came out, the Treasury bond market rallied sharply, sending the 10-year yield below 4.5%, a threshold that suggests bond investors believe the Fed not only will ease next year, but ease two or three times.