The stock market is feeling mellow, but the bond market is sensing inflation

As of early this morning, the yield curve -- the difference in yield between a 2-year Treasury note and a 10-year Treasury note -- sits at a record 285 basis points. Fork over your money to the gubmint for two years and you get a paltry 0.88%.

But 10 years? You get 3.73%. Yes, that’s paltry too. But it’s hard to ignore the gap being this wide. Bond buyers expect a substantially higher yield if they’re going to lend money to Uncle Sam for the next 10 years. That means they sense the value of the dollars they get back will be diminishing.

At least that’s what they sense right now. We hesitate to suggest the bond vigilantes are back; we’ve been down that road before. That said, there’s evidence the mortgage vigilantes are out in force. The spread between 10-year notes and 30-year mortgage rates is also widening, and also points to growing inflation expectations for 2010.