The ultimate sign of recovery – no reason to freak out about higher bond yields

This is from CNBC.com:

U.S. Treasurys prices eased for a second day after jobless claims data suggested solid improvement in the labor market, while stocks’ gains undermined the appeal of lower-risk government debt.

The Treasury Department auctioned $13 billion of reopened 30-year bonds on Thursday at a high yield of 3.248 percent. The bid-to-cover ratio, an indicator of demand, was 2.43, the lowest level since August.

In the when-issued market, considered a proxy for where the bonds will price at auction, 30-year bonds were yielding about 3.24 percent. The auction followed solid demand in the sales of $21 billion of reopened 10-year notes on Wednesday and $32 billion of three-year notes on Tuesday.

US bond yields continue to inch higher. To me that is the ultimate sign that easier monetary conditions is pushing up nominal GDP (and very likely also real GDP).

But I am afraid that we will soon hear somebody warn us that higher bond yields will kill the recovery. But we of course know that when bond yields and equity prices are rising in parallel then it is normally a very good sign of higher aggregate demand and that is of course exactly what we need.

So if we avoid the biggest fallacy in economics and ask why bond yields are rising then we should find a lot of comfort in the fact that US stock prices are rising as well.

And finally there is some Keynesians out there that can explain to me why global stock prices continue to inch up, bond yields are rising and the US consumer seems completely unaffected despite of the fiscal cliff (I told you so!) and the sequester. Market Monetarists of course have an answer – it is monetary policy dominance – monetary policy can always offset any impact on aggregate demand from a fiscal shock. It is very simple – and is the positive spin on the Sumner Critique. (Here is a model textbook Keynesian should be able to understand).

PS yes you got it right – I am very optimistic both on the markets and on the recovery at least in the US (I have been optimistic for a while – see here and here). My only two fears are that the ECB once again will do something stupid or that we will have a repeat of the mistakes of 19367-37 – premature monetary tightening from the fed. Italian politics is, however, not keeping me awake at night.

Update: I wrote above my worry was the ECB. I should have said the EU/IMF. The terms for the EU/IMF bail out of Cyprus scare me quite a bit. So much for the rule of law…

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