Treasury Yields Rise as TIPS Challenge Inflation Narrative

The recent surge in US Treasury yields has left some market observers attributing it to inflation expectations fueled by higher energy prices. However, Treasury Inflation-Protected Securities (TIPS) suggest that real yields are driving the rise.

US government debt has been undergoing a multi-month sell-off since reaching local lows in early March. The 30-year Treasury yield has reached its highest level since 2007, with the two-year yield rising 76 basis points (bps) in this window. This coincides with a September rate hike by the Federal Reserve being priced into the markets at 63%, according to CME FedWatch.

The rise in yields has made government bond investments more profitable than cash-and-carry trades in the crypto markets, as per Glassnode's latest research. The five-year breakeven rate on TIPS has gone down sharply since May, indicating that expected inflation is falling.