Inflation Expectations in the US Bond Market

Bond markets are telling, and often times great predictors of the future.  With all of the talk of Quantitative Easing 2, and the announcement yesterday, I wanted to see what the bond market feels about QE2's effect on inflation. 

In the first chart, I just want to show the current spread.  We see that over a 10 yr period, bond investors are expecting to see 2.18% inflation. To explain, the 10 yr Note Yields 218 bps more than the 10 yr Treasury Inflation Protected Security (which has no interest rate risk).




First Chart:  10 Yr US Treasury Bond Yield Index (orange) against the 10 Yr US Treasury Inflation Protected Bond Yield Index (white) over the last year.

 In the second chart, which is the same as the first just over a shorter period, we see the increase in this spread.  It shows that in the past month (the time period in which we have started to see serious talk about Quantitative Easing 2) the expectation for inflation has increased by over 20%. 

Second Chart: 10 Yr US Treasury Bond Yield Index (orange) against the 10 Yr US Treasury Inflations Protected Bond Yield Index (white) over the last month.

It will be interesting to see how Quantitative Easing works out.  This spread is one indicator to watch, as it will give you real time inflation expectations. 

Kevin