(Bloomberg News) There has been no better place in the U.S. government bond market since 2008 than in debt that protects against faster inflation. Now, traders say the securities may be poised to fall as consumer prices rise too slowly to justify the gains.

Treasury Inflation-Protected Securities returned 17% the last two years, compared with gains of 1.9% in Treasuries, Bank of America Merrill Lynch indexes show. Yields on 10-year TIPS show bondholders expect the consumer price index to increase 2.18 percentage points a year on average over the life of the debt. The rate rose 1.5% in 2010 and is forecast to climb 1.7% this year, based on a Bloomberg survey of more than 60 economists.

"We're nowhere near any inflationary type of levels," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's private wealth unit in New York. "There's a lot of slack in the U.S. economy, especially in the labor market. It's too soon to get too bullish on TIPS."

The mismatch in expectations may suggest the portion of the U.S. government bond market established in 1997 as a buffer against inflation may be losing some of its predictive power.

Breakeven Rates

Demand for TIPS has pushed the difference between yields on the debt and non-inflation-linked Treasuries, known as the breakeven rate, as high as 2.42 percentage points this month on 10-year debt, up from 1.47 percentage points in August, on concern that the Federal Reserve's plan to buy $600 billion of Treasuries would spark faster inflation as the central bank prints more cash.

Break-even rates advanced on Jan. 5 to within 21 basis points of the 263 level reached in July 2008 when oil touched a record $147.27 a barrel and as consumer prices rose 5.6%, the most since 1990. Crude fell 2.7% last week to $89.11.

The break-even rate exceeded the consumer price index by as much as 132 basis points, or 1.32 percentage points. Since 1998, it has averaged 43 basis points less than CPI, according to data compiled by Bloomberg.

"A lot of the fears of the inflation hawks are going to be priced out of the market in the coming months," said Eric Van Nostrand, a New York-based TIPS strategist at Credit Suisse Group AG.

Bond Auction

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