Editor’s note: Today, Porter turns the Journal over to his colleague Marty Fridson, who spent years researching bond yields at Salomon Brothers, Morgan Stanley, and Merrill Lynch and became known for his innovative work in credit analysis and investment strategy.

The old maxim that “all news is good news” does not apply to interest rates on U.S. Treasury bonds.

Rising Treasury yields are big news these days. Here are just a few recent headlines…

“U.S. Government Debt Rout Triggers ‘Vicious Loop’ of Selling”

(Financial Times, September 30)

“Why Bond Yields Are Surging To Fresh 24-Year Highs”

(Barron’s, October 7)

And after yesterday’s Treasury bond auction:

“U.S. Treasury Pays Highest Borrowing Cost Since 2000”

(Wall Street Journal, October 7)

From its monthly low of 3.96% in February, the benchmark 10-year Treasury’s yield jumped to 5.27% in September. A 1.31 percentage-point move may not sound like a big deal to stock market followers, but it’s a major move in the bond world. In only two of the last 30 years has there been a comparably large rise over a seven-month period.

So what’s behind that 131-basis-point upsurge? (1 basis point = 1/100 percentage point)

Suspicion immediately falls on inflation. Way back in 1896, economist Irving Fisher explained that interest rates incorporate a premium that lenders demand for the loss of purchasing power they expect to suffer between lending the money and getting it back when the loan matures. Notice that we’re not talking about the current inflation rate, but what matters more to famously forward-looking financial markets – what inflation is expected to be in the future.

Nowadays we have a direct, market-based measure of the inflation rate that investors expect and incorporate into the rates they charge. It’s the TIPS breakeven rate. That’s the yield difference between conventional Treasury bonds and Treasury Inflation-Protected Securities (“TIPS”). Between February and September, the 10-year TIPS breakeven rate increased, but by only eight basis points.

That leaves 123 basis points still to be explained.