links for 2009-06-12
The U.S. Treasury-Eurodollar Interest Rate Spread (TED) Spread Is Back to Normal

(Small) Interest Rate Increases Are Good News, Not Bad News (Washington Post Crashed-and-Burned-and-Smoking Watch)

Over at the Financial Times, the careful, insightful, and highly intelligent Martin Wolf writes: / Columnists / Martin Wolf - Rising government bond rates prove policy works: Is the US... on the road to fiscal Armageddon? Are recent jumps in government bond rates proof that investors are worried about fiscal prospects? My answers to these questions are: No and No.... [T]here are... right now and strong reasons for welcoming recent moves in the bond markets....

The jump in bond rates is a desirable normalisation after a panic. Investors rushed into the dollar and government bonds. Now they are rushing out again. Welcome to the giddy world of financial markets.... What has happened is a sudden return to normality.... [W]hat about the other concern caused by huge bond issuance: crowding out of private borrowers? This would show itself in rising real interest rates. Again, the evidence is overwhelmingly to the contrary.... [A]s confidence has grown, spreads between corporate bonds and Treasuries have fallen (see chart). One can also use estimates of expected inflation derived from government bonds to estimate real rates of interest on corporate bonds. These have also fallen sharply (see chart). While riskier bonds are yielding more than they were two years ago, they are yielding far less than in late 2008. This, too, is very good news indeed.....

[T]he last concern: the fear of inflation.... People need to believe that the extraordinarily aggressive monetary and fiscal policies of today will be reversed. If they do not believe this, there could well be a big upsurge in inflationary expectations long before the world economy has recovered. If that were to happen, policymakers would be caught in a painful squeeze and the world might indeed end up in 1970s-style stagflation. The exceptional policies used to deal with extreme circumstances are working.... It is irresponsible to insist either on immediate tightening or on persistently loose policies. Both the US and the UK now risk the latter. But their critics risk making an equal and opposite mistake. The answer is both clear and tricky: choose sharp tightening, but not yet.

Over at the Washington Post, the , , and _ Neil Irwin writes:

Spike in Interest Rates Could Choke Recovery: Rising long-term interest rates are making it more expensive for home buyers, corporations and the U.S. government to borrow money, threatening to further stifle an already weak economy. In just the past two weeks, the rate on a 30-year, fixed-rate mortgage has risen to 5.6 percent from 4.9 percent, ending a boom in refinancing and working against a budding recovery in the housing market. Rates on corporate borrowing have also risen, making it more expensive for companies to expand. And the government has been forced to pay more to finance its deficit.

Since the beginning of the year, historically low mortgage rates have had a twin benefit for the economy: They have allowed homeowners to refinance about $1.5 trillion worth of mortgages, thus lowering monthly payments and leaving people with more money to spend on goods and services. Low rates have also created greater incentive for people to buy homes, despite continuing troubles in the housing market. The abrupt rise in rates has removed that key stimulant for the economy.

The rise has many causes, some of which reflect good news. As investors have grown more confident about the future, for example, they have become more inclined to put money in risky investments, such as the stock market, rather than lending it to the U.S. government and to government-backed mortgage companies. But other causes give more reason for worry. Investors around the world are increasingly fearful that Congress and the Obama administration will be unwilling to bring taxes and spending in line in the years ahead. That makes the U.S. government appear to be a riskier borrower, leading those who lend to it to demand higher interest payments.

The Federal Reserve now finds itself in a box. It could try to lower rates by buying government debt. It has already said it would buy $1.5 trillion in U.S. Treasuries and mortgage-related securities this year to try to stimulate growth. But doing so would likely only deepen fears that the Fed will print money to fund government deficits in the future. That possibility -- while rejected by Fed officials and many mainstream economists -- means that expanding purchases might not have the intended effect of lowering rates. It could even drive them up further...

General equilibrium. Long-term interest rates have risen because banks expect that four or five years from now the economy will be stronger than they thought two months ago and so they will be able to lend their money out more profitably then--even with higher interest rates. The rise in interest rates is the result of a stronger anticipated recovery, not the cause of a weaker one.

Neil Irwin's economist sources are:

  • Scott Anderson, a senior economist at Wells Fargo: "Households really have no capacity to afford higher rates at this point.... It affects the cost of any long-term borrowing a consumer or business might do, whether it's auto loans, mortgages or business credit..."
  • Jay Brinkman, chief economist of the MBA, who says "The increase so far has not really been enough to choke off home buying..."

In short, Neil Irwin did not find an economic forecaster who would agree with his headline--"Spike in Interest Rates Could Choke Recovery"--yet he wrote the article anyway.

Think about that.

Why oh why can't we have a better press corps?