SMI Visitor's Blog       

Welcome to the SMI Visitor's Blog where you'll find selected excerpts from our Member's Blog, plus occasional posts created especially for our visitors.

For SMI Web Members, click here to go to the SMI Member Blog.

« Blog Home

Rising rates? That's a good sign, Prof. Siegel says

Interest rates on U.S. Treasury notes have jumped sharply in the past month, leading some pundits to argue that the rising rates are evidence that the Fed's QE2 policy is backfiring.

On the contrary, says Jeremy Siegel of the University of Pennsylvania's Wharton School (and author of Stocks for the Long Run), writing in yesterday's Wall Street Journal (subscribers' link):

Long-term Treasury rates are influenced positively by economic growth — which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity — and by inflationary expectations.

Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields.

The Fed's QE2 program has raised expectations of growth and inflation, sending long-term Treasury rates up. It has also lowered risk aversion, which implies rising long-term rates.

The evidence for a decline in risk aversion among investors is the shrinkage in the spreads between Treasury and other fixed-income securities, the strong performance of the stock market, and the decline in VIX, the indicator of future stock-market volatility. This means that expectations of accelerating economic growth — and a reduction in the fear of a double-dip recession — are the driving forces behind the rise in rates.

Siegel concedes that growth expectations have also been boosted by the tax deal currently before the Congress, "[b]ut long-term Treasury rates were rising even before Mr. Obama announced his policy switch."

The Wharton professor isn't the only one who thinks the combined impact of Fed's QE2 policy and the tax deal will juice the economy. PIMCO, which runs the world’s largest bond fund, last week upped its growth estimate to a range of 3.0-3.5 percent (by the end of 2011) from an earlier estimate for 2.0-2.5 percent.

PIMCO CEO Mohamed El-Erian told Bloomberg the revision came in light of the "massive amount" of fiscal and monetary stimulus expected to be pumped into the economy.

Powered by Movable Type  |   Subscribe  |   Email Updates