Word: bonde
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...that a collapse of the U.S. banking system seems unlikely, stock-market watchers have found a new thing to worry about: rising interest rates. The yield on the government's 10-year Treasury bond is up 65% this year to a recent 3.83%. Says top Wall Street strategist Edward Yardeni, "If bond yields get up to 4.5%, so not much higher than they are now, I think we would see a real decline in mortgage refinancing, which would threaten the viability of the economic recovery." (Read "Economic Recovery: Will Corporate Profits Recoup...
...good news is that in the past two years, the yield curve has gone from a bunny slope to a double black diamond. The difference between the 3-month Treasury bills and U.S. 10-year bond is now 3.65 percentage points. Two years ago, the difference between those two rates was a mere quarter of a point...
...What's more, despite higher government-bond yields, corporations are actually paying less to borrow than they did a few months ago. As the credit crisis continues to ease, those rates could come down even further, making it cheaper for companies to borrow and expand their businesses. According to Credit Suisse, the average yield on bonds with an investment-grade rating has dropped a full percentage point to 6.2% from 7.2% at the beginning of the year. "The concern that higher interest rates will slow the recovery is prevalent among a lot of market watchers...
...rates are often a harbinger of good things to come. Yes, an uptick in interest costs can slow a galloping economy. But in recessions, like we are in now, higher interest rates usually signal better economic times ahead, not worse. For instance, the yield on the 10-year government bond rose nearly 20% in November 2001 - the last month of that recession. Indeed, many economists believe the rise in interest rates now signals a return to normal, and not a sign that we are in for more trouble...
...there are tides, and there are currents. I keep thinking of something I heard Mohamed El-Erian, CEO of bond-investing giant Pimco, say at a conference in April: "We are so focused on whether recovery will be at the end of this year or the beginning of the next that we lose sight of the more important question. It's not whether the recession will be over; it's, What does the new normal look like?" (Watch TIME's video of Peter Schiff trash-talking the markets...