Tuesday, June 2, 2009

Is the rise in US Treasury yields a problem? Part I

The massive rise in UST yields (and the resulting curve steepening) has been another reason for the bears to rise their voices against a potential economic recovery as rising yields would kill any such development. However, while the 160bp rise in 10y UST yields since the start of the year cannot be neglected, we should look deeper for clues whether this will prove harmful for a recovery or not. Yes, mortgage rates have started to rise as of late adding to the existing downward pressures in the housing market. However, most credit-related yields have continued to fall due to the ongoing compression in credit spreads alongside the recovery in risk appetite and risky asset markets. Just as the record low yields around the turn have only been signalling an environment of easy money for the government and not for most corporates and households, the rise in UST yields is (not yet) hurting most corporates given that their funding costs are still falling.
Overall, the higher the rating and the more explicit the government involvement (i.e. US Treasuries, Mortgage rates etc.), the more pronounced the rise in yields.

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