Inflation Concerns On the Rise

Thursday, May 28, 2009

The spread between the 2-year and 10-year Treasury notes is on the rise hitting the highest level ever yesterday peaking at 2.76%. The rising spread is reflective of the overall yield curve in the US markets. The yield curve has been steadily steepening since going inverted in 2007. Recently, the spread has seen a surge from the December 2008 low to hit new highs. Investors are beginning to price in higher inflation going forward and, in turn, lenders to the US government are demanding higher yields for longer maturities. The fears of inflation are coupled with Federal Reserve's aggressive actions on the short end of the curve to keep rates artificially low. The market may be forecasting an economic recovery which will trigger increased inflation.


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