Thursday, March 25, 2010

Higher Treasury yields, please

At 3.91% as I write this, the yield on 10-year Treasury bonds is only 4 bps lower than its 2009 high which was recorded last June. That high, in turn, occurred about the time that the market began to sense that the economy was emerging from the recession that began in early 2008. I continue to believe that yields on the 10-yr T-bond serve as an excellent gauge of the market's expectations for growth in the U.S. economy. It looks to me like the economy is capable of 3-4% growth, so if the evidence continues to accumulate in support of that, I would fully expect 10-yr yields to rise towards 4.5% or higher. This will not be cause for alarm, it will be simply a confirmation of improved growth expectations, and as such should pose no risk to the stock market.


acrossthecurve said...

Wouldn't higher interest rates hurt consumer demand and possibly lower growth expectations?

I like you're posts, great blog.

Scott Grannis said...

I've talked at length about this issue over the past year. The short answer is that interest rates would have to go a lot higher than they are now before it would begin to hurt consumer demand. Short rates would have to be 4-5% or more, long rates maybe 5-6% or more. Also, it's important to understand that higher rates will follow a strengthening of the economy. For a long time to come, a stronger economy will be the driving factor behind higher rates. It will only be when the Fed becomes extremely tight that higher rates will begin to weaken the economy.

Little know fact: U.S. households on balance benefit from higher rates, because they have much more in the way of floating rate assets than floating rate debt.