WaPo Worries That The End May Be Near!

Today the Washington Post had a story all worried about ten year interest rates going from around 3.5% on March 4 to nearly 4.0% yesterday. They note that this might reflect expectations of growth, but also worry that it might reflect expectations of rising inflation and dangers of collapse due to rising indebtedness. They did not bring up the earlier worrying that this was due to the Chinese not buying US bonds to punish us since they ran a trade deficit in March and did not have much money to buy foreign bonds with. They also worried about associated increases in housing mortgage interest rates, which tend to track the ten-year bond rate.

Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year. The winding down of this has been gradual, but in fact the real story here has been that the dropping of this final shoe had many on tenterhooks that there might not be anybody there at all to pick up the slack in the MBS market. If that had been the case, we would have seen mortgage rate increases far in excess of what happened, which was in line with the ten-year bond rate increase. This is one of those stories about how a dog did not bark, and in this case, to really mix my metaphors, we have apparently missed a dangerous bullet that could have thoroughly derailed the nascent recovery.