S&P 500 Vs. 10-Year TIPs Spread

Here’s a fascinating chart. The increase in the 10-year TIPs spread (in red) closely matches the rebound in the stock market (in blue). The TIPs spread is the difference between the 10-year Treasury yield and the yield on the inflation-protected yield. In other words, it’s the market’s view of expected inflation.

Of course, there’s a causation/correlation angle here. Did inflation expectations increase because investor optimism increased? Or did higher share prices lead to a concern about higher prices?

Either way, the Fed’s efforts to increase inflation expectations starting last year worked, and stocks climbed as well. The problem is that the TIPs spread peaked in early April and the peak in stocks came shortly afterward.

If there is good news in this, it’s that the rally in bonds has been matched by a stronger rally in TIPS. That translates to a slightly wider TIPs spread.

Posted by on August 4th, 2011 at 8:21 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.