Wednesday, February 25, 2009
Treasury bond yields are up since their all-time lows of late last year. Rising bond yields in the current environment are unequivocally positive signs. Nominal yields have risen much more than real yields on TIPS, which means that investors have lost a good deal of their fear of deflation. The modest rise in real yields can be taken as a sign that investors expect the economy to be a bit stronger (or less weak) in the future. With less risk of deflation and a greater likelihood of a return to growth, the general outlook improves significantly.
Some people worry that higher Treasury yields will be an added burden to the economy, but I don't agree. For now, higher yields can only mean that the outlook is brighter because deflation and depression risk are lower. Consider also that higher interest rates are not necessarily bad in any event. U.S. households have a lot more floating rate assets than they do floating rate debt, so higher interest rates are a boon to the household sector. Think of all the retired folk who are struggling with paltry interest payments on their bank CDs.
Posted by Scott Grannis at 3:04 PM