Bruce Krasting is a the most level-headed example of the bond market hysteria facing the world over the last few days.
“Absent a new move by the Fed to contain long-term interest rates, the ten-year looks like it is headed to 3%. The Chinese are not buying, the banks are full up with paper (and underwater), PIMCO et al are long duration up the wazoo, and any thought that retail interest in five-year bonds at 1% will save the day is just misguided(dumb money is not that dumb).”
Real interest rates in the .7% range are really low historically. Take a look yourself.
Right now, the government is not paying any money after expected inflation to issue 10 year bonds. It’s paying -.29%. I am not sure what needs to be contained at these levels, because they are really low levels. For example, the 10 year could spike to 5% before we’d begin to average in real rates what we averaged through most of the 2000’s.
By paying such a low rate, we’re taking money out of the hands of bond holders and doing nothing with it.
Higher rates might even be good for the economy. A famous book by Marc Lavioe and Wynne Godley has a model where higher interest rates leads to higher employment and a more robust economy.
For example, in the model in Chapter 11, a higher rate of interest produces a paradoxical effect, bringing about a positive impact on output and employment in the long run. Interest payments are treated like a public expenditure, generating a positive multiplier effect, despite the negative short-run impact on business investment.
I don’t have that book yet. It seems like a must read to me. I’d see the higher rates on the back end of the curve as being a good sign, not a bad sign.