Good News: Treasury Bond Yields Are Rising

| About: iShares TIPS (TIP)

Treasury bond yields are up since their all-time lows of late last year. Rising bond yields in the current environment is unequivocally a positive sign. Nominal yields have risen much more than real yields on TIPS, which means that investors have lost a good deal of their fear of deflation. The modest rise in real yields can be taken as a sign that investors expect the economy to be a bit stronger (or less weak) in the future. With less risk of deflation and a greater likelihood of a return to growth, the general outlook improves significantly.

Some people worry that higher Treasury yields will be an added burden to the economy, but I don't agree. For now, higher yields can only mean that the outlook is brighter because deflation and depression risk are lower. Consider also that higher interest rates are not necessarily bad in any event. U.S. households have a lot more floating rate assets than they do floating rate debt, so higher interest rates are a boon to the household sector. Think of all the retired folk who are struggling with paltry interest payments on their bank CDs.

With mortgage rates about as low as they've ever been, it's time to refinance if you haven't already and if you can. 10-year Treasury yields are already up about 80 bps from their lows, and if they continue to move higher then mortgage rates will be under pressure to rise. Refinancing activity is already well above its historic levels, but not quite as strong as we've seen at other times when Treasury yields dipped to new lows. Undoubtedly this has to do with the fact that many homeowners who would like to refinance can't, because they don't have sufficient equity in their homes.