Concerned, not concerned, or happy?

James Hamilton has a March 28 post discussing the recent rise in interest rates:

Interest rates spike up

How scary is it?

The Wall Street Journal reports:

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher– a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds’ prices sharply lower and yields higher.

Paul Krugman (also here) and Brad DeLong are not concerned, noting we’ve seen lots of yield changes of this size or higher in the past.

I regard medium term nominal rates as a pretty good indicator of NGDP growth expectations.  So, I’m neither “concerned” nor “not concerned;” I’m happy to see rates rise. 

Hamilton discounts the possibility that the higher rates signal higher inflation:

One possibility that I think we can rule out is that recent bond moves signal renewed worries about inflation. The recent surge in yields on Treasury Inflation Protected Securities is just as dramatic.

I’ve also been following the TIPS, and agree that real rates are rising.  I believe this signals higher real growth expectations.  Hamilton understands this argument, but is a bit skeptical of market forecasts:

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. 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.

These quotations represent Hamilton’s views as of  March 28.  So what’s happened since then?  Here is Hamilton on April 4th

Looks good to me

Finally we’re starting to see some convincing indications of economic recovery.

There are no “indications” that are more convincing than the consensus market forecast.  Market’s aren’t even close to being infallible, but they’re the best indicators that we have.

PS.  I forgot to mention the good news on the Chinese yuan.  The Obama administration has backed off from a reckless policy of confrontation.  And look how the markets reacted:

China’s yuan barely reacted in offshore forward Asian markets on Monday, apparently reflecting investor sentiment that the U.S. decision will not shift of the value of the yuan a year hence.

One-year NDFs moved from 6.645 per dollar to 6.639, which still implied an appreciation of about 2.8 percent in a year’s time. But markets in Hong Kong and Shanghai, the main centers for yuan trading, were closed for holidays.

So the yuan actually rose slightly in the futures markets.  This suggests to me that the Chinese don’t like being pushed around, and the markets figured that any US pressure on China would be ineffective, or perhaps even counterproductive.  Three percent a year appreciation in the yuan seems appropriate if their goal is low inflation.



6 Responses to “Concerned, not concerned, or happy?”

  1. Gravatar of Doc Merlin Doc Merlin
    5. April 2010 at 07:42

    Using tips to predict future inflation rates has strange circularity problems, since to price TIPS you need to know the future inflation rates.

  2. Gravatar of Buying time – Economics - Buying time - Economics -
    5. April 2010 at 13:26

    [...] create breathing space for China to begin easing the peg. Markets appear to agree. As Scott Sumner points out futures on the Chinese currency rose on news of the delay, indicating that pushing back the [...]

  3. Gravatar of ssumner ssumner
    5. April 2010 at 15:43

    Doc Merlin, Actually there is no cicularity problem here. Academics like me use the TIPS market to infer market predictions. Market traders develop their own inflation forecasts, and then trade TIPS based on theose forecasts. The market equilibrium reveals the consensus forecast of inflation. Anyone who uses the TIPS spread to forecast is basically inferring market forecasts.

  4. Gravatar of Doc Merlin Doc Merlin
    5. April 2010 at 16:58

    Got yah, scott.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. April 2010 at 21:31

    The term spread between the 2 and 10 year Note reached an average of 2.83% in February which is a record on data going back to June 1976. I’d take this as fantastic news if it were not for the fact that one end of the yield curve is bound by ZIRP. Still, all in all….

  6. Gravatar of scott sumner scott sumner
    6. April 2010 at 04:39

    Mark, Those are exactly my thoughts (and Krugman’s thoughts as well, if I am not mistaken.)

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