Friday, September 10, 2010
The 34 bps rise in 10-yr Treasury yields this month is a good indication of how market sentiment—which by late August was obsessed by the belief that the U.S. economy was on the verge of a double-dip recession—is changing. As I've explained many times before, very low yields on Treasuries only make sense if one believes that the prospects for the economy are dim. Rising yields therefore reflect rising optimism (or perhaps it would be better to say receding pessimism). The economic data of late have been not nearly as bad as the market had expected, and of course commodity prices continue to rise.
Not surprisingly, yields and equity prices have moved higher in virtual lockstep this month. I'm guessing this is only the first chapter in what will be a long story of recovery: higher yields and higher prices for risky assets.
It would be a mistake to think that higher yields threaten the recovery. It's the other way around—the recovery threatens those who have purchased Treasuries.
Posted by Scott Grannis at 8:46 AM