Morgan Stanley Sees Higher Treasury Yields in 2010. Economic Recovery in Jeopardy?

by Justin Weinger on December 28, 2009

Thanks to a ballooning Federal fiscal deficit, Oliver Biggadike and Daniel Kruger of report that the chief fixed-income economist at Morgan Stanley believes the yield of 10 year U.S. Treasury will climb to 5.5% in 2010, which is about 40% higher than the current yield. 

(Click here to read their article in full).

This is pretty sobering news for the economic recovery, as many consumer and business loans, including many of the most popular types of mortgages, are tied to Treasury yields. As these yields increase, the more expensive it becomes to borrow money, not just for the U.S. government, but for the Average Joe, as well.

Obviously, the more it costs to borrow money to finance a home purchase, the more likely we are to see the recovery in housing – and the economy in general – stall out. However, this may be what is needed to get our country’s finances in order, and to help foster long-term, sustainable economic growth.

In order to truly get the deficit under control, lawmakers will likely have to attack the problem aggressively from both the revenue and expense side of the problem. This means raising taxes – on everyone, not just the “wealthy” – and cutting government spending.

Unfortunately, since both of these actions are political suicide – voters tend to not re-elect people who take more of their hard-earned money (tax increase) or pass legislation that hurts employment and curbs social programs (spending cuts) – I’m afraid the deficit won’t be addressed until it’s too late.

At that point, welcome to the more painful second-leg of The Great Recession.


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