The yield on the benchmark Treasury is climbing–again.
Yesterday, the 10 year closed at just under 4.98%, the highest since last August. The immediate cause of the renaissance in the price of money is the growing suspicion that the recession has been postponed–again.
Almost no one’s arguing that economic growth’s about to explode on the upside, but the latest batch of data suggests that a contraction in GDP isn’t imminent either. The most persuasive evidence came in yesterday’s update on the ISM index of non-manufacturing activity, otherwise known as the service sector. The gauge rose last month to its highest since April 2006, reversing March’s tumble and suggesting that growth still has some momentum.
But along with the upward momentum in business activity comes news that prices are following suit. As David Resler, chief economist with Nomura Securities in New York, wrote in a note to clients yesterday, “Non-manufacturing businesses continue to face rising prices as the prices paid index rose to 66.4 in May, the highest since last August (71.9).”
The bubbling of pricing pressure hasn’t been lost on the bond market, which now sees fit to err on the side of caution as to what comes next. Adding to the anxiety in pricing money is yesterday’s counsel from Fed Chairman Ben Bernanke on the always delicate matter of inflation. “Although core inflation seems likely to moderate gradually over time,” the chairman said in prepared remarks for the International Monetary conference in South Africa, “the risks to this forecast remain to the upside.”
The potential for future inflation trouble, in short, isn’t quite dead, he warned–again.