High Treasury Rates Threatening The Economy? Nonsense!

Northern Trust economist Paul Kasriel has a message for those who think the spiking rates on long-term Treasuries will kill the economic recovery:

Grow a brain!

Paul notes the divergence between Treasury yields and yields on other, riskier bonds and says the current Treasury spike is just the result of traders climbing out of the bomb shelter (and dumping safe assets):

There is a lot in the press these days about how the recent rise in Treasury bond yields has the potential to abort a nascent economic recovery. To this I say, nonsense!

Chart 1 shows that as the Treasury bond yield has risen in recent weeks, the yields on privately-issued debt have declined in absolute levels… [T]he stock market has [also] been trending higher since March as the Treasury bond yield has risen.

This combination of a rise in the Treasury bond yield, declines in yields on privately-issued bonds and rising stock prices is consistent with an asset allocation shift away from an asset with no credit risk to assets with credit risk. How can this lessen the chances of an economic recovery? If the current and increased supply of Treasury debt coming to market were “crowding out” private debt issuance, then the yields on privately-issued debt would be holding steady or rising in tandem with the rise in the Treasury bond yield. But again, yields on privately-issued debt are falling. In sum, investor risk appetite is returning, which is a good thing for the prospects of an economic recovery, not a bad thing. 


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