Yellow inflation warning from the TIPS market

If there's really no inflation, someone should let the guys in the TIPS market know ... because they're hoisting a big, bright yellow flag.

Some history first ... Several weeks back, I noted that the TIPS market was getting frisky. Specifically, I pointed out that the 10-year TIPS spread was widening out. That's the difference in yield between 10-year nominal Treasuries and 10-year Treasury Inflation Protected Securities. The wider the spread, the more worried bond traders are getting about inflation. Read the original post for more details.

Fast-forward to today ... and you can see in this chart that the TIPS spread is now running at 242 basis points. That's the worst level since mid-September. What's driving this activity?

Maybe it's the fact crude oil prices surged 5.3% today, while heating oil posted its biggest gain in 16 months.

Maybe it's because the economy appears to have rebounded from its recent rough patch.

Maybe it's because it's obvious to everyone but the Fed that easy money is out of control (Case in point: Eurozone M3 skyrocketed 9.7% YOY in December, the biggest gain since 1990) ... and that the excess funds are inflating several asset classes.

Whatever the cause, the effect is that we have a real-time indicator of inflation worries breaking out to the upside. You have to wonder if the Federal Open Market Committee will acknowledge that in its post-meeting statement tomorrow.