Is the US economy really recovering?
Reuters reports that the Fed Reserve is puzzling over the steepening yield curve for US Treasuries:
But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.
Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.
Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.
Traditionally, an increase in yield for US Treasuries signify the former, although concerns about potential future inflation in the US as well as the Treasury losing its AAA rating (which it retained even during the Great Depression) and its status as world reserve currency may explain the yield increase. Some have questioned if the Fed Reserve’s strategy of quantitative easing (aka money printing) would devalue the greenback and make worthless its bonds. This was published in the WSJ earlier as well.
Then there’s also the question of how rising T-yields may make it difficult for homeowners to re-finance mortgages, as well as maintain low mortgage rates..
Personally I feel that it’s premature to conclude that the economy is recovering. FT has an article on this dated 28th May where the author dissess the chances of recovery being U,V or W-shaped:
The essential problem is there is still a vast amount of deleveraging and restructuring that needs to be done, after the recent credit bubble: and on current evidence, that cleansing process could take years.
Europe’s corporate landscape, for example, is currently littered with heavily-indebted companies in dire need of restructuring, but which are somehow still staggering on because their creditors are unwilling to pull the plug. Ineos, the chemical giant, is just one case in point. In America, consumers remain laden with debt which they have barely begun to pay down. On both sides of the Atlantic, numerous banks remain neither dead nor fully alive, propped up by government support.
Most pernicious of all, the government bond world is threatening to dampen any cheer. Until now, Western governments have found it relatively easy to sell debt, even as projected issuance has surged. But this week’s activity in the treasuries market suggests that investors are getting jittery.