On a conference call today with some people in the financial sector I made sure everyone was aware of this:
I think a lot of casual observes (i.e. not the bond traders obviously) just think about the fed funds rate, and maybe the really short maturity Treasuries. But as the chart above shows (from here), the yields on 7-year and 10-year Treasuries have risen dramatically in just the last twelve months. In particular, the nominal 7-year yield has risen from 1.23% to 2.31%.
There are lots of ways to explain what’s happened, but be careful–if you go to the link and fiddle around with the settings, you’ll see that back in March 2011 (i.e. three years ago), the yield curve was uniformly above where it is right now.
I realize some of us have been raising alarm bells since the winter of 2008, and that other analysts have accused us of crying wolf, but I really don’t see how this ends well. The Keynesians have lectured guys like me saying, “When nominal interest rates are near zero, bonds and cash are interchangeable, so open market operations don’t have the usual impact on spending and prices.” OK, so what happens if the yield curve keeps shifting up, especially if the increase filters down to the shorter maturities? At some point, the commercial banks are going to resume normal lending, and the Fed will have to either raise the interest rate it pays on excess reserves, or it will have to rapidly reduce its balance sheet. Either way spells trouble.