A flatter yield curve means the market isn't worried about inflation -- but if you are, TIPS look modestly cheap

The yield curve has been flattening steadily over the past six months. The yield on the ten-year bond is only about 80 bps more than the two-year. This is expected as the Fed has been raising the short end of the curve and the market doesn’t seem to be worried about inflation. However, if you are worried about inflation now might be a good time to consider TIPS…

According to bond portfolio manager Bill Irving of Fidelity Investments, TIPS look somewhat cheap relative to treasuries after underperforming for the past few months. Irving also points out that spreads on corporate and high-yield bonds are tight and implied volatility on bonds is very low. Which means it may make sense to consider reducing risk there.

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