by Calculated Risk on 3/04/2008 01:57:00 PM

Click on graph for larger image.

UPDATE: Here is a graph (see bottom) of the spread between the five year TIPS, and the 5 year treasury (graph from Bloomberg, hat tip Brian).

This shows that inflation expectation have surged recently.



From Bloomberg: Treasury Five-Year TIPS Yields Fall Below Zero for Third Day

Yields on five-year Treasury Inflation-Protected Securities fell below zero for a third day on investor speculation that inflation will quicken as the U.S. economy slows.
...
Five-year TIPS yield about 2.35 percentage points less than similar-maturity Treasuries, reflecting the rate of inflation investors expect over the life of the securities.

TIPS pay a lower rate of interest than regular Treasuries because their principal rises in tandem with a version of the consumer price index that includes food and energy prices.

The yield being below zero is a curiosity, but the important issue is the spread between the TIPS and the treasuries with the same duration. This is a measure of inflation expectactions. Fed Chairman Ben Bernanke has consistently stated that inflation expectations appeared "well anchored". It looks like the anchor is slipping a bit.