The price of safety is falling -- excellent news

I think this is one of the most important developments in recent days—T-bill yields are rising. 3-mo. T-bills are the world's risk-free asset. Until recently, their yield had fallen to zero (and was briefly negative). Bill yields are now rising. They are still miniscule, but they are clearly rising. I'd say this chart is the best picture you'll find of the state of the economy, which is most likely in a slow bottoming process.

T-bills represent the very front end of the Treasury yield curve, and are the preferred habitat of all those who demand absolute (such as the world ruled by men can provide) safety. Rising bill yields will thus reflect reduced demands for safety and growing confidence that the economy and the financial markets are on the mend and not on the skids.

Rising Treasury yields will occur in lockstep with improvements in the economy. Treasury yields are currently priced to the expectation that the economy will be extremely weak for an extended period; that inflation will likely be negative for at least the next 5 years; and that because of anemic growth and deflation the Fed will keep policy extremely accommodative for at least the balance of this year, and not raise short-term interest rates meaningfully until sometime in 2010. Therefore any tendency for the economy to pick up and/or deflation pressures to subside will automatically result in expectations for an earlier monetary tightening from the Fed and thus higher Treasury yields across the board.

I would agree with those who say that Treasury yields are in "bubble territory." They are priced to the assumption that the economy has very little chance of a meaningful recovery for as far as the eye can see, and that inflation will remain extremely low for a very long time. Those are very risky assumptions in my view.