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Home Publications Blogs Beat the Press The End of Extraordinarily Low Interest Rates Is Not Grounds for Panic

The End of Extraordinarily Low Interest Rates Is Not Grounds for Panic

Wednesday, 15 December 2010 04:59

The interest rate on 10-year Treasury bonds plummeted in the summer, falling at one point to under 2.4 percent. It has recently risen back to a still very low rate just under 4.5 percent.

The Washington Post had a front page piece that highlighted this run-up in rates. The piece warned that higher rates will slow the economy and raise the government's borrowing costs. It suggested that the higher rates could be attributable to the tax deal between President Obama and the Republicans in Congress which will close to $900 billion in debt over the next two years.

It is worth noting that the recent rise in interest rates puts them at almost exactly the level projected by the Congressional Budget Office (CBO) last summer. CBO projected that the 10-year Treasury bill rate would average 3.4 percent for 2010 and 3.5 percent for 2011. The CBO projections suggest that the drop in interest rates was the development that needed to be explained, not the recent increase.

Comments (9)Add Comment
written by bakho, December 15, 2010 5:49
I thought getting interest rates away from the zero bound was a goal, not a problem?
written by K. Williams, December 15, 2010 6:47
I think you have a typo here -- the 10-year rate has risen to just under 3.5 percent, not 4.5 percent.
written by ted bundy, December 15, 2010 7:18
If the 10-year T-note had risen to just uner *4.5%*, I'd be creaming my pants while gobbling up those juicy, juicy yields.
Rising Interest Rates Signal Growth and Collapse Phase of Economy
written by izzatzo, December 15, 2010 7:39
From the WaPo article, this quote:
The rise is partly because of good news: The outlook for growth has improved, putting less pressure on investors to keep their money in ultra-safe bonds. ... And the better economic outlook could allow the Fed to pull back sooner than expected on the extraordinary steps it's taking to keep rates low. But bond investors are also spooked by the tax-cut deal ... which if enacted would increase the budget deficit substantially over the next two years.

Reporting on the tea leaves of rising interest rates, WaPo presents todays Austerian predictions:

Interest paid by government is rising because the risk of more public debt is rising.

Interest paid by government is rising because the private sector has shifted away from government investment, crowding it out for more attractive private investment, which pulls up government rates.

Rising interest rates are a signal that the economy has now entered the growth and collapse phase as predicted by the Austerians. As the economy tries to grow out of crippling debt, the fear of even more debt from the tax cut deal collides with and overwhelms in the opposing direction whatever new growth may sprout up.

Apparently tax cuts for the rich don't pay for themselves after all in the form of a demand-side stimulus. Rising interest rates are good for the economy because they're bad for the economy, a Calvinist view of economic risk and reward.

In order for the economy to grow, first there must be pain for no gain paid by the unemployed before there can be pain for gain reaped by the employed. Read Calvinism Econ 101, Austerian Growth for the Downtrodden, Punitive Rewards and Trickle Up.
written by skeptonomist, December 15, 2010 8:14
10-year and longer Treasury rates quit falling at the end of August and were headed back up by the beginning of October. Mid-maturities (e.g. 5-year) continued downward until after Bernanke announced that the Fed would be buying $600B of them in early November, when they suddenly started upward.

What could these movements possibly have to do with the tax cut deal? I have yet to see an account of interest rates anywhere in the media that has any correspondence with the actual data.
4.5 %
written by sam, December 15, 2010 10:19
I went running over to bloomberg when I saw that 4.5. That would be news!
There's something to what izzatzo says,
written by diesel, December 15, 2010 11:56
At bottom austerity can be seen as an extension of the private need to suffer and inflict punishment. Cloaked in the mantle of religious righteousness and spoken with the authority of God's own voice, who are we, mere mortals, to argue.

Or, if you like, you can sublimate your fetish by invoking economic necessity dictated by Natural Law, the Market, what have you....

Either way, the commandment to suffer comes not from one's own predilections, but is transferred to an unimpeachable authority for whom one acts as the dutiful but blameless bearer of the Word.
written by umass1993, December 15, 2010 3:15
10Y TBonds about 3.5%
30Y TBonds about 4.5%

just checked
Note also FT
written by Regular Reader, December 16, 2010 9:36
Martin Wolf in the Financial Times . . . December 15 2010, page 11 . . .

"Terrified by irresponsible fiscal and monetary policies, the bond market vigilantes are out in force. So rose the cry, as rates on government bonds jumped last week. Alas for the panic-mongers, this glib story is nonsense."

I can't speak to his reasons for saying this:


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.