Not really, but perhaps Neil Irwin should moonlight as a gymnast, because he is doing one heck of a job bending over backward to give us the pessimistic take in this story about rising interest rates before slapping it down from every angle. Most important is to note that these long-term interest rates are "low by any historical standards." Nonetheless, these historically low interest rates are still a "Rorschach test" for us. If you're optimistic ...
... there is a benign explanation. With the economy performing better, the Federal Reserve will eventually have to raise interest rates to stave off inflation, and in anticipation of higher future rates, long-term investors are already demanding compensation. Moreover, the strong economy is making investors confident enough to move their money into risky assets such as corporate debt from safe government bonds, creating a gush of money away from Treasury securities.
Oh, cool. Market data offers confirmation for this scenario! Economic data has "exceeded expectations"! Two bank economists even agree. On the other hand, if you're a pessimist ...
With public debt levels soaring around the world, the supply of bonds has begun to outstrip investors' appetite for them. Some investors may be questioning whether the United States will ever get its fiscal house in order and are demanding higher rates because the federal government seems to be a riskier borrower than in the recent past. Meanwhile, investors' expectations about inflation may edge up, leading them to require higher interest rates.
Oh, someone may be questioning something? What about empirical data? Oh, "bond buyers could come to think that the government will not be able to rein in its budget deficit." Hmm ... um, what about inflation expectations? "That data suggest that investors expect modest inflation over the coming decade, just over 2 percent per year." So, um, does the inflation hawk case have any merit?
"I don't buy it at all," said Robert Barbera, chief economist for the Investment Technology Group. "There's been no new news about the fiscal picture. We didn't just discover that there are big budget deficits over the last 60 days. What has changed over the last 60 days is the economy is doing a hell of a lot better than expected."
A-ha. Maybe we should chill out with all this talk of a debt crisis.
-- Tim Fernholz
