What is happening is known as a “steepening of the yield curve”, with long-term rates rising while short-term rates hold. This tends to portend faster economic growth; it is the opposite of an “inversion of the yield curve”, which is known as a harbinger of recessions.
But the flip side is that the time seems to have passed when the bond markets have given the government a clear signal to do whatever is necessary to stimulate the economy, essentially making endless funding available to the government. extremely low cost. This could have implications for how the Biden administration approaches the rest of its economic agenda.
Treasury Secretary Janet Yellen stressed that low interest rates, which keep the cost of servicing debt low, are important in her thinking about how much the government can easily borrow and spend.
Speaking to the New York Times on Monday’s DealBook, Ms Yellen, after noting that the ratio of government debt to the size of the economy is much larger than it was before the global financial crisis, said, “Look at a different measure, which is more important, what is the cost of this debt. Take the example of interest payments on debt as a percentage of GDP ”, which are lower than 2007 levels.
“So I think we have more fiscal space than before because of the interest rate environment,” Yellen told The Times, Andrew Ross Sorkin.
By implication, the more bond yields rise and inflation expectations with them, the more limited the Biden administration would see in its spending potential. Congress is now working on a $ 1.9 trillion pandemic assistance package, which Democratic leaders hope to pass in March. They are considering a large-scale infrastructure plan after that.
Jerome Powell, Chairman of the Federal Reserve, faced questions from Congress Tuesday on central bank policy. He stressed the importance of getting the economy back to health first and foremost on targets, and called the rise in bond yields in recent weeks benign. “In a way, it’s a declaration of confidence on the part of the markets that we will have a robust and ultimately complete recovery,” Powell told the Senate Banking Committee.