The recent rally in Treasury securities, which has left the 10-year yield near record lows, gives the Federal Reserve room to implement another round of quantitative easing (QE), experts say.
Decelerating inflation and signs of slowing economic growth have some Fed officials talking about the possibility of more accommodation. Those factors, combined with Europe’s financial crisis, which has sparked a flight to Treasurys as a safe haven, have pushed bond yields down.
And Treasury yields themselves reflect inflation expectations, so the yield decline is a sign of optimism about inflation in the bond market.
Consumer prices rose 2.3 percent in the year through April, the smallest 12-month gain in more than a year.
The shrinking yield differential between 10-year Treasurys and Treasury Inflation Protected Securities (TIPS) shows that bond market participants expect an annual inflation rate of 2.13 percent over the next 10 years.
"Two months ago, inflation expectations were high enough that the Fed could have been criticized for stoking inflation with a QE program," Eric Van Nostrand, an interest-rate strategist at Credit Suisse, tells The Wall Street Journal.
"But they've fallen enough in recent weeks that [Fed Chairman Ben] Bernanke has more political room to maneuver."
New York Fed President William Dudley tells CNBC that the central bank may well be able to refrain from easing, but will have to act if the economy falters and inflation shrinks.
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