unprecedented divergence in TIPS vs T-Notes

the two outliers, or ‘tails’, scenarios for the FED:

1)they FAIL to stimulate reflation, and the macro-deflation becomes dominant … or …

2) they go too far, and spark a hyper-price-inflation episode.

These two ‘tails’ are exhibited in the overlay chart on display below plotting the path of the iShare for the Treasury’s Inflation Protected Securities, or TIPS (symbol-TIP, blue line) … against … the yield on the 5-Year Treasury Note (red bars) … revealing a MASSIVE ‘divergence’, and break in the normally tight positive correlation between the two ‘markets’.

The PROBLEM for the Fed … can be seen in the width of the disconnect, which represents the level to which Treasury yields ‘could’ rise, if inflation were to become more prominent, with the TIPS implying a 5-Year Note Yield closer to 4%, than the current 1%. We wonder … how many T-Notes would the Fed need to buy, to keep yields from rising, and crushing the fragile macro-consumer-economy ???

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via Time Loves a Hero – John Mauldin’s Outside the Box – InvestorsInsight.com

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