Senin, 19 Agustus 2013

Three cheers for higher yields

10-yr Treasury yields are up 130 bps from their all-time lows, and that's absolutely great news. Yields are not up because the market is worried about a tapering of Quantitative Easing. Yields are up because both the market and the Fed realize that the economic fundamentals are improving. Remember how 10-yr yields soared from late 2009 through early 2010, despite the Fed's first round of QE? That wasn't the death of the economy, that was the signal that the economy had recovered. Higher yields naturally accompany stronger growth. If the economy really does pick up some speed, 10-yr yields are likely to move even higher, probably to 3.5% or even 4%. 

The rise in real yields is the key, since they tend to track the underlying growth potential of the economy. Real yields are up and gold is down, and those moves point to a stronger economy with less uncertainty. They both reflect a decline in the world's demand for safe assets, and that is happening because uncertainty is declining. With confidence beginning to return, we should see stronger economic growth emerge over the next year or two.

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