MARKETWATCH: January 17 - 20, 2011
Over the past week, interest rates on the benchmark 10 year Treasury bond rose. Key drivers were: less safe haven demand for US government instruments (a “flight to quality” typically pushes down interest rates) and increased demand for US government instruments with higher yields, based on signs that the US economy is continuing to recover.
Less safe haven interest in the US reflected diminished fears that Europe would have new sovereign debt crises. Several EU countries considered most at risk had successful government debt auctions. Taking the pulse of the US economy, weekly unemployment claims to-date in January and some manufacturing indicators suggest that downside risks to the recovery may be receding and that growth is becoming increasingly self-sustaining. Risks on both the EU and US domestic economic fronts remain however.
Medium and long-term interest rates have increased considerably since hitting post 2009 crisis lows last October (2010). The rise in interest rates is so far considered to be part of the return to a normal recovery. As of mid-day today (January 20), yields on 10 year Treasuries are around a full percentage point higher than they were three months ago. Similar trends can be seen in the 30 year mortgage market. Experts attribute the rise to the Fed’s commitment to support the economy, through its second round of quantitative easing (dubbed QE2), which appears to have increased confidence that the recovery would continue to build. It is too soon to assess concrete effects of the December Congressional tax package (most measures started just after the new year), although positive effects on market confidence (which usually boost economic activity) appear to have kicked in during December.