Wednesday, December 22, 2010

5-Year TIPS Yield Spread Reach 2%

The spread between regular U.S. 5-year treasury securities and inflation-indexed ones reached 200 basis, as the regular security had a 1.97% yield and the inflation-indexed one had a -0.03% yield, implying an expected inflation of 2% per year the coming 5 years. This spread is up about 80 basis points since the Fed started to warn about QE2, reflecting a drop of about 25 basis points in in the inflation-indexed yield and a 55 basis points increase in the regular yield.

QE2 has certainly been a success in terms of raising inflationary expectations. Whether that is really desirable is however questionable to say the least.