Bond Yields Rise, Indicating Belief in Economic Recovery

by Justin Weinger on December 22, 2009

Don’t look now, but it appears that investors are betting on an economic recovery in 2010 that will be stronger than most economists are currently predicting.

Since the beginning of the week, the yield on the 10 year Treasury bond – which is pretty much the benchmark in terms of outward looking economic indicators – has climbed from 3.51% to 3.72%.

This 21 basis point increase indicates investors have moved their money from treasuries, which are considered safe investments due to the guarantee of the Federal government, to more risky investments like equities and commodities.

In taking a broader look, on November 30 the 10 year Treasury yield stood at 3.20%, which is historically a very low number. Since the 30th, a number of indicators – jobless claims, unemployment rate, manufacturing activity, housing starts, etc. – have either met or exceeded economists’ expectations, giving hope that we’re not on the verge of a “double-dip” recession.

However, while rising bond yields may be a sign of good things to come, it may not be entirely good news.

Since many consumer and business loans are tied to or mirror bond yields, it’s very likely that over the next several months, it will become more expensive to borrow money. Obviously, this increased cost puts added pressure on consumers and businesses alike, and could slow or stifle the economic rebound.

It will be interesting to see where bond yields head from here, and whether or not the 10 year Treasury has any trouble crossing the important 4% mark. If holiday spending exceeds expectations, then I think you can expect yields to continue to rise.

However, if over the coming weeks, economic indicators show slowing or deteriorating economic conditions, expect Treasury yields to fall yet again.

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