Bonds have sold off steadily over the past two months, taking the yield on the 10-year Treasury note to its highest levels since the spring. The yield was up 5 basis points Friday at 3.27%, which is nearly a full percentage point above its October low.

At the same time, inflation expectations as measured by the yields on inflation-protected Treasury securities have risen as well.

Bernanke himself has claimed QE2 works by lowering yields, so any rise in interest rates seems to show him up. What’s more, higher interest rates and rising inflation expectations sound scary.

The financial press is full of warnings that the Federal Reserve’s latest expansionary gambit, known as QE2 for quantitative easing, is leading us down the garden path to trade wars and dollar collapse and hyperinflation and all the rest.

With the government still playing extend-and-pretend on its fiscal problems, we find ourselves in what you might call the Fred Sanford market. It responds to any yield backup by staggering around, grabbing its chest and yelling, “This is the big one!”

But another reading of the recent action is that the rising yields signal not an oncoming heart attack, but a stronger economic recovery – thanks in part, believe it or not, to the widely ridiculed QE2.

“A reasonable interpretation of the upward trend in inflation expectations and real yields is that the Fed’s policy is actually working,” said David Beckworth, an economist at Texas State who has been making the case for an even more aggressive course of quantitative easing.

Beckworth notes that rising real yields tend to follow the growth of the economy. Though real yields fell immediately after Bernanke promised in August to consider QE2 – the speech suggested he knew bad news about the economy investors didn’t, in one interpretation – they have doubled off their October lows and now are back above 1%.

That’s still below their 1.5% or so level at the start of 2010, but it is a welcome shift after a falling trend for most of the year, Beckworth said.

Of course, Fed policy is far from the only factor at work. The bond market bloodbath this week followed a deal between the White House and congressional Republicans to extend tax cuts and do more stimulus spending, which should help the economy a bit in coming months at the expense once again of an ever-widening deficit.

“The Treasury market has been acting a bit overwhelmed,” said Anthony Karydakis, a senior economist for Commerzbank in New York. “You have an improving tone in the economic numbers and you can see the government’s financing needs aren’t going away, and those two in combination have driven the selloff.”

The question now is whether the rising trend in inflation expectations and real yields will continue, or whether we are simply seeing the latest case of the market overreacting to a small perceived shift in the economic outlook.

The bond market has been wrong about a stronger recovery before, of course, most recently during a similar yield spike in April just before the spring meltdown of the euro and the U.S. stock market. That sent yields tumbling for six months.

But as long as economic numbers continue to show steady improvement, and the euro zone steers clear of a total meltdown, higher bond yields and slowly rising inflation expectations could be with us to stay. That would confirm a real recovery is under way, Beckworth says.

“We’re definitely at an inflection point in the rate cycle,” said Karydakis, though he cautions that a pullback in rates is possible because the situation “is definitely not as scary as you might have thought from the last couple days.”

A gathering recovery would leave one last mystery, which is why Bernanke would go around depicting QE2 as an effort to drive down yields rather than more broadly as a bid to get the economy rolling again. Obviously there’s no point in going around at this early stage declaring mission accomplished, yet Beckworth still says he is stumped.

“The Fed is doing a bad job selling this,” he says. “The idea is to change the outlook, not to bring yields down even further. The way Bernanke is talking puts them in a corner they don’t want to be in.”