Robert J. Samuelson
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Jun 8, 2009 01:39 PM
Is the recent runup of interest rates on long-term Treasuries good news or bad? Well, put the Bank for International Settlements in the good news camp.
Since the end of February, interest rates on government bonds worldwide have risen sharply. The rates on 10-year U.S. Treasuries were up about 45 basis points to 3.45 percent by the end of May, while yields on comparable euro area and Japanese bonds rose about 45 basis points and 20 basis points to 3.6 percent and l.5 percent, respectively.
Broadly speaking, there are two explanations for the runup.
The first is good news: investors are now more confident; they think the worst of the financial crisis is over, and so some of the mad dash into Treasury bonds--as a refuge from risk--is reversing . As more money moves into stocks and other bonds, the prices of Treasuries bounds decline, and their interest rates rise. (Bond prices and interest rates move inversely: when bond prices fall, their interest rates rise.) That's good news, because it indicates that financial markets are working more normally.
The other theory is bad news: investors are growing increasingly nervous that the huge amounts of money and credit pumped out by central banks, led by the Fed, are laying the groundwork for higher inflation. Therefore, lenders require higher interest rates (a greater "inflation premium") to compensate them for the expected loss of value of their money. That's bad news, because it implies higher interest rates across the board and also suggests that investors aren't becoming much calmer.
In
its latest Quarterly Review, the Bank for International Settlements--a bank for government central banks, located in Basel, Switzerland--tentatively comes down on the side of good news. There has been, it argues, a "rebound in risk appetite. As the demand for risky assets increases, pressures in government bond markets due to a flight to safety and liquidity began to ease, thereby pushing yields higher." It cites the rebound in stock prices and the decline of interest rates on high-grade corporate bonds as evidence that investors are more adventurous than a few months ago. It notes, too, that surveys show no pronounced increase in "inflationary expectations."
However, there is some contrary evidence; the widening gap between inflation-protected bonds and nominal bonds suggests some rise in inflationary fears. Finally, it's worth noting that in June, rates on U.S. Treasuries have continued to climb. On Friday (June 5), they were 3.84 percent.
