TIPS Give Way to Inflation as Deflation Yields Drop

The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way for him to start withdrawing cash pumped into the economy since 2007.

The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.

Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week. (more)