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My Two Cents

Rising Rates

Chris Farrell Jun 18, 2007

There’s a lot of handwringing over the rise in long-term interest rates, especially when it comes to stock market values. But I’m skeptical for now. The jump in long-term bond yields doesn’t seem to reflect rising inflation. An overall increase in the price level just isn’t in the numbers.

No, a better interpretation is that higher yields are driven by optimism among investors that the economy will grow at a faster pace without generating genuine inflation pressures.

To be sure, mortgage rates are climbing and that’s bad news for the housing market (and not just the subprime portion of it). But gains in the rest of the economy will be strong enough to offset the housing drag. At least that’s what I think the bond market is saying.

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