Thursday, February 18, 2010

Risk aversion is receding

I mentioned earlier this month that the rise in 3-mo. T-bill rates was something to keep an eye on. Rates have now gone from essentially zero to 11 basis points. That's not huge, but on the margin it reflects a decline in the market's risk aversion and/or desire for safety. Rates jumped today across the yield curve, as signs of recovery continue to trump fears of another recession. The Fed also announced a rise in the discount rate to 0.75%. That's not actually a tightening, but it is a step in the direction of slowly returning to normal.

Once more I will note that higher interest rates are not bad news for the economy. The Fed is not tight, and no matter what, monetary policy will not be tight for a very long time. Higher interest rates on Treasuries are best viewed as excellent signs that the economy is getting better.

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