A certain amount of attention has been focused on the recent jump in the yields on longer-term US government bonds. There are at least two interpretations:
1) This is good news. In normal times, an increase in the spread between long- and short-term interest rates would be interpreted as a signal that the economy is improving.
2) This is bad news. This increase is a sign that - as Niall Ferguson puts it - "the bond market is quailing" at the prospect of a US government that may or may not be able to honour its debts.
Once again, it's useful to compare what's going on in the US to what we're seeing here in Canada:
As we all know, Canada's deficit and debt picture resembles in no way that of the US. But a US recovery is a sufficient (although perhaps not necessary) condition for a Canadian recovery.
If investors were suddenly concerned about default, it's hard to see why Canadian bond yields should be affected in the same way that US yields would be. But if investors are anticipating a US recovery that would spill over to Canada, then we would expect long-term interest rates in both countries to increase.
So this looks like good news to me.
Nice argument, and one that I would like to believe is true, but somehow I think that Canadian rates are tied to US rates irrespective of each nation's deficits and debt. This has been especially true these past several months. Just consider the move in Canadian yields during the middle of March when the Fed announced they were going to buy Treasuries. As your chart above shows, Canadian yields dropped nearly 0.3% for a change of policy affecting US debt. The rise we've seen in Canadian yields this past month might also be simply tied to the rise in US yields.
Still, I hope you're right.
Posted by: Kosta | June 02, 2009 at 09:19 PM
So then it may be worth looking at the relative rate of change in yields.
Posted by: Andrew F | June 02, 2009 at 10:36 PM
Sorry, I misread the legend on that chart--please disregard the above.
Posted by: Andrew F | June 02, 2009 at 10:37 PM
That feels like a good argument to me. I hope this post gets picked up by some US blogs. Using Canadian data to interpret what's happening in the US isn't obvious.
Posted by: Nick Rowe | June 02, 2009 at 11:17 PM
Stephan, agreed. This is a really good point.
Posted by: Adam P | June 03, 2009 at 01:42 AM
Sorry, that should of course be addressed to Stephen.
Posted by: Adam P | June 03, 2009 at 01:43 AM