Donald Marron's  Instablog

Treasury yields have been surging.  The yield on 10-year Treasuries, for example, closed at 3.71 percent on Wednesday, up more than 60 basis points over the past two weeks.  That’s a big move.

Economic commentators are grappling to understand the causes and implications of this increase.  Is it the return of bond vigilantes worrying about the grim U.S. fiscal situation?  Concern that aggressive policy actions will ignite inflationary pressures?  Or, perhaps, just a sign of healing in the financial markets?

I don’t have an answer for you today.  But I did find one tidbit that suggests that there’s something to the healing hypothesis.  Treasury yields – on both regular 10-year bonds and their inflation-indexed equivalents – are almost exactly where they were before the fall of Lehman:

                                    9/12/2008                           5/27/2009

     Regular                      3.74%                                      3.71%                                   

     Inflation-Indexed       1.79%                                      1.83%

In the months after Lehman’s fall, yields on regular Treasuries plummeted in a massive flight to liquidity, while yields on less-liquid inflation-indexed bonds rose sharply.

Those moves have reversed in recent months bringing both 10-year Treasury yields back to where they started.

Disclosure: No position in any Treasury securities.

Source: Federal Reserve Board, Release H.15