Is it an ominous sign, or just another step on the journey back to normalcy?
For the moment, the jury’s out, but there’s no question that the benchmark 10-year Treasury Note’s yield is upwardly mobile these days. Yesterday’s jump to 3.71% elevated the yield to its highest since last November. What does it mean?
One interpretation is that the yield is simply returning to something approaching normalcy. As the threat of economic and financial disaster recedes, the price of money is expected to return to levels that prevailed before the world seemed to be coming apart in the last four months of 2008. That implies a return to the 3.5%-4.0% range for the 10-year, a range that was prevalent for much of last summer.
But in the current economic climate, nothing is quite as benign as it appears. Recall that it was only in March that the Federal Reserve announced that it would buy long government bonds to keep long rates low as part of its efforts to stimulate economic recovery. Immediately following the news, the yield on the 10-year dropped by an extraordinary 50 basis points in a single trading session, closing at around 2.5% on March 18. As of last night, the 10-year yield was 120 basis points higher. What does that say about the Fed’s plans to keep rates low?