Treasury yields are turning up -- a very positive sign

The bounce in yields that started earlier this month is still in its infancy, but nevertheless it represents significant change on the margin. T-bill yields have risen from being slightly negative to now 0.21%. No longer are investors willing to accept a zero yield for the privilege of investing in the world's safest asset. 10-year Treasury yields are up 65 bps from their Dec. 30th lows, mainly because investors are now worrying less about deflation and more about inflation. (We know this because TIPS yields have declined while Treasury yields have risen; Treasuries are good for deflation, while TIPS are good for inflation.) 2-year Treasury yields are up 35 bps since their December low; since that yield essentially represents the market's estimate for the average Fed funds rate over the next two years, this suggests that the market's expectation for what the funds rate will be two years from now has risen by about 70 bps, and that is a good indication that economic recovery expectations are awakening.

So fear is declining (and the VIX index confirms this) and concerns about a deflationary depression are declining as well. The politicians would say that the massive stimulus bill looming on the horizon has done the trick, but I would say that things are improving despite the awful implications of a massive increase in government spending and the future taxes necessary to fund it.