Econoblog on interest rates

I was pleased to participate in the latest
Wall Street Journal Econoblog

with Mark Zandi, Chief Economist and co-founder of Moody’s 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.

There’s much more over at
the WSJ
with an opportunity for you to offer your own perspective either


or right here.

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4 thoughts on “Econoblog on interest rates

  1. stan jonas

    Would your comments change a bit.. now that the markets are beginning to price in the probability of the FED easing again by October of this year??
    But I’m glad to see that as a professional your comments were carefully all phrased in the “conditional tens”
    But it raises an interesting point,if your original fears (which for convenience we’ll label the Goldman Sachs Scenario) actually came to fruition.
    After having seen the dramatic repricing in the marketplace.. Would that still mean you (they)were “right?” If that’s the case the word “right” needs some serious redefinition.
    I would recommend Philip Tetlock’s great work on the failings of “expertise” for a handle on this problem

  2. jg

    Increased interest rates from drying up global liquidity sounds reasonable; tightened lending standards sounds reasonable.
    With all of the ‘fun’ going on behind closed doors with Bear Stearns and Brookstreet, I assume that we’ll soon be seeing the return of reasonable/historic risk premiums –> higher long term rates –> another nail in the housing coffin.

  3. pyhron

    Do I have my signs wrong?
    When things get risky isn’t that when “risk free” rates should come down?
    But perhaps I miss which risk premium you jg is referring to?
    With zero coupon rates around 5 1/2 % in US Treasuries.. that means that in about 13 years I double my money “certain”
    The risk would be in being long anything else?

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