Why Are Bond Rates Rising?

Long-term interest rates have been rising, and on his New York Times blog Paul Krugman offers his take on why.

Krugman says an increase in long-term rates usually results from one of three scenarios: “One is that the bond vigilantes have arrived, and are selling US debt because they now believe in the horror stories. Another is that the Fed has changed, that it may be ready to snatch away the punch bowl sooner than previously believed. And the third is that the economy is looking stronger than expected, which means that the Fed, although just as soft-hearted as before, will nonetheless start raising rates sooner than previously believed.”

Krugman says those scenarios would impact other markets, allowing us to see which may be at play. Debt fears, for example, would also likely lead stocks downward, which hasn’t happened. A tougher Fed, meanwhile, would likely mean a stronger dollar, which has happened, but declining stocks, which hasn’t happened.

The rising bond rate third scenario, Krugman says, would mean a rising dollar and rising stocks, however — which describes what has been occurring over the past month or so. “So,” he says, “this looks like a story about macroeconomic optimism.”