I was pleased to participate in the latest
Wall Street Journal Econoblog
with Mark Zandi, Chief Economist and co-founder of Moody’s Economy.com. Here’s a brief preview of what you can
find over at the WSJ.
Our topic was the following question:
Treasury-bond yields, a benchmark for market interest rates, scared investors earlier this month with a sharp rise, and pull back. What was behind the uptick? And what does it mean?
And here is part of what we said.
Long-term bond yields are generally procyclical, falling with the decreased spending and borrowing that accompanies an economic slowdown. Indeed, a lot of us look at the spread between long-term and short-term yields as a predictor of what is going to happen to economic growth. When the 10-year yield fell below the overnight fed funds rate from 2006:Q2 to 2007:Q1, that was followed by slower than average real GDP growth. But if investors are now expecting stronger growth, that could explain why nominal rates, TIPS yields, the dollar, and stocks have all risen together.
Behind the higher rates is slowly evaporating global liquidity. This is
most evident in tighter monetary policies across much of the globe.
Central banks ranging from the European Central Bank to the Chinese
Central Bank are in the midst of a series of tightening moves. Indeed,
the Federal Reserve is the only major central bank not expected to
tighten policy again before the year is over….
Given that 80% of mortgage
loans are fixed rate loans, this will be another significant hurdle for
the housing market to overcome. The spring selling season was already a bust prior to the run-up in
long-term rates. Home sales are being hit hard by the tightening in
lending standards in response to the stunning erosion in mortgage credit
quality. It will be very difficult to make any progress in reducing the
bulging inventories of new and existing homes without further
substantial cuts in housing construction and house prices.
Unfortunately, Mark is exactly right about housing. I had been among those who incorrectly predicted that lower mortgage rates would arrest the housing downturn last fall. I think we did see some evidence of a rebound, but then the sector was hit badly by the tightening lending standards Mark mentioned. Now with mortgage rates back up and, as Mark also noted, the inventory of unsold homes, it’s hard to find any reason for optimism in this sector.
But the housing bust has been subtracting 1% from annual GDP growth for a year now. What we’ve clearly seen is that, unless some other part of the economy follows it down, a recession in housing need not mean falling overall GDP.