Rising inflation may cause Treasury bond yields to spike

Reuters reports:

Investors intent on sheltering assets from credit market upheaval and the risks of recession are so enamored with safe-haven Treasury bonds they seem to have dismissed their usual concerns about inflation.

The latest headline U.S. Consumer Price Index rose above the benchmark 10-year U.S. Treasury note's yield for only the second time since December 1980, notes Bryan Taylor, chief economist with Global Financial Data in Los Angeles.

Low-yielding bonds are especially sensitive to rising inflation because it can quickly erase returns.

The only other occasion that inflation outstripped U.S. Treasury note yields in the last 27 years was a brief moment in September 2005.

Given the current state of inflation, bond strategists are now starting to warn there's a growing threat that bond yields will spike -- should food and energy prices stay high. That's a sobering prospect for investors in bonds because their prices fall when yields rise.

"When you are looking at 4 percent-plus inflation, who would think 10-year notes at 4 percent yield are a good place to hide out in a flight-to-quality trade?" asked Ted Ake, executive director and head of bond trading with Mizuho Securities USA in New York.

You'll be hearing more about this situation.