Thursday, June 11, 2009

Rising Treasury Yields a Sign of "Healing," Not Inflation Fears, Kedrosky Says

Thursday's $11 billion auction of 30-year Treasury bonds debunked a myth about foreigners not wanting U.S. debt anymore, and provides another opportunity to discuss what rising Treasury yields "really" mean.

First, for all the hysteria over foreigners fading willingness to buy U.S. debt, an awful lot of them participated in the auction. Indirect bidders, which include foreign central banks, bought 49% of Thursday's auction vs. an average of 25.2% in the past 10 auctions, Bloomberg reports. (Notably, even Wednesday's "bad" 10-year auction saw indirect bidders take 34.2% of the $19 billion total vs. an average of 23.2% for the previous five, says Moody's

The bottom line: There is demand for U.S. debt at the "right" price and a lot of tough talk from foreign central banks is just rhetoric, at least for now.

Second, rising Treasury yields are a sign of "healing" in the financial markets -- not necessarily a signal of inflation fears as is often stated, says Paul Kedrosky, blogger and senior fellow at the Kauffman Foundation. Yields got artificially low during the heart of the crisis late last year and their rise is a signal of both economic stabilization and investors' renewed appetite for risk, Kedrosky says. The rally in stocks - the S&P 500 hit a 7-month high Thursday - is the most obvious example, with advancing commodity prices being a close second. But fixed-income investors are also moving out of the "safest" assets and into riskier sectors, which is a big reason why Treasury yields are rising, he notes.