May 21, 2012
Below is a live graph from the St. Louis Fed showing the historical TIPS spread. The TIPS spread is the difference between the yields of conventional Treasury securities (T-bonds) and Inflation-protected securities (TIPS). The conventional security yield is normally higher and therefore shows on the top of the graph. The TIPS’ yield is lower and at the bottom of the graph.
The spread between the two yields actually reveal the market’s expectation of coming inflation. If the spread widens out it means the market is expecting more inflation. If the spread converges, then the market isn’t expecting much inflation.
The Fed has consistently sought an approximate spread of about 2%, which theoretically indicates a moderately healthy growth rate in the economy. During the crisis of 2008, the spread converged, signaling very little inflation expectation – even the threat of deflation as the conventional dropped below the TIPS. The easing policies which the Fed embarked on had the overall affect of re-widening the spread.