As someone that was planning on shorting the heck out of US treasuries by mid-year 2009, I’ve been watching the 10-year and 30-year yields quite closely. The 10-year closed at a low of 2.08% December 18th, 2008 and the 30-year closed at a low with a yield of 2.53% on the same day. The 10-year yield went up to 2.75% at the close on Friday and the 30-year yield went up to 3.47%; 10-year is up 67 bps and the 30-year is up 94 bps. Yields have increases far faster than I expected.
What does this mean? It’s costing the US more and more money for other countries to float our debt. Our creditors need more return to balance the increasing credit risk of the United States. This is not good, particularly when we ask for more money for fiscal stimulus in another 6-9 months. Yields will rise even further, and as yields rise, the cost of borrowing increases, putting downward pressure on economic growth. As TM said on this board about a month ago; there is no such thing as a free lunch. How true it is.
Rising treasury yields is only the beginning, as increasing tax rates will be the next step. You simply cannot deficit spend yourself out of a recession and think that everything will be fine and dandy. There will be un-intended consequences that will inhibit economic growth in the long-run. Rising interest rates and tax rates will be the most apparent, but the kicker may be a weakening entrepreneurial spirit.