What does the recent "spike" in bond yields really mean? To listen to folks like Greenspan or Robert Samuelson, it means investors are worried about US creditworthiness.
And while I've gone on about this twice the past few days, here's a more useful reality check, courtesy of James Hamilton, a professor of finance at the University of California at San Diego who the Fed actually pays some attention to.
First of all, says Hamilton, the increase in yields is more of an uptick than a spike, and it's hardly unprecedented.
Still, he concedes there is potential concern here. "Whether demand will continue to be there for burgeoning US debt is obviously a question of great interest. Yields are now near the highest levels we've seen since the Lehman failure in September 2008, and if they continue to move up at their recent pace I wouldn't want to dismiss it as an irrelevant development."
But Hamilton notes that the increase might just as easily mean the economy is recovering. Higher rates, after all, usually ensue when that happens.
Of course, bond investors may also worry that the recovery will produce inflation. But Hamilton notes that inflation doesn't seem to be a concern among investors because the surge in Treasury Inflation Protected securities has been no less dramatic.
In fact, Hamilton notes that stock prices have also been rising, and that they usually don't if inflation is a concern. Instead, he says, investors seem to believe a real, that is, a non-inflationary recovery is in the cards, though recent indicators suggest they are wrong.
Here's hoping investors are right, says Hamilton. "When bond yields and stock prices rise together, I would usually read that as a signal of rising investor optimism about future real economic activity," he writes. "The February numbers for home sales and other indicators that we've been receiving most recently don't exactly support that thesis. Let's hope that investors are correctly anticipating that better news lies ahead."
Amen to that. I would only add that with the Fed clearly saying it wants to shrink its balance sheet by more than half after doubling it to stem the financial crisis, I can't see how rates have anywhere to go but up.
The biggest question in my mind is whether doing so would abort a recovery. But since the Fed seems to be pushing on a string anyway right now in terms of reviving demand, maybe increases would have little downward effect on it as well.