Treasury inflation protected securities (TIPS)-that are designed to protect against rising inflation--have been big winners this year. Barclays US TIPS index has returned 4.9% year-to-date.
The yield on the 10-year TIPS is now the lowest in a year and the spread between 10-year TIPS and the regular Treasury notes has been rising in recent months. Further, a recent auction for TIPS saw its biggest demand in 2 years.
While inflation has remained much below Fed's target of 2% there are signs that inflation expectations have started rising.
The personal consumption expenditures price index-one of the Fed's preferred measures of inflation--was up by 1.6% in April from a year ago. It was the highest level for the index since November 2012.
The data from the Federal Reserve Bank of Cleveland shows a modest rise in inflation expectations in recent months.
While FOMC members project inflation to reach about 1.5% by the end of this year and between 1.5% and 2% in 2015, many economists now believe that the headline number may exceed the Fed's target later this year.
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