TIPS Give Way to Inflation as Deflation Yields Drop  

www.bloomberg.com, By Daniel Kruger,December 21, 2009, http://www.bloomberg.com/apps/news?pid=20601068&sid=aDiqYY7Mop8w

Dec. 21 (Bloomberg) -- The market for Treasury inflation protected securities is showing Federal Reserve Chairman Ben S. Bernanke won the battle with deflation, paving the way for him to start withdrawing cash pumped into the economy since 2007.

The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said  Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.

Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent and the unprecedented stimulus that prevented more bank failures during the worst financial crisis since the Great Depression. Now, TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10-year Treasury note hit a four-month high of 3.62 percent last week.

“It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said CarlLantz, an interest-rate strategist in New York at Credit Suisse Securities Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed. 

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  -  There you go!  Interest rates are more than likely heading up!  As the Fed tries to catch and slow inflationary expectations as soon as possible.  Unemployment is not the Fed's biggest worry anymore, Ben and company are more worried about how to get rid of all the extra money they have created since the crisis began.