Bonds Signal Stronger Recovery in the U.S.

The difference between short-term and long-term interest rates on U.S. government bonds set a new record on December 21, shattering the milestone it set in June. According to the Wall Street Journal, this suggests that investors are expecting a more robust turnaround for the American economy.

This should be good news for Asia, which remains dependent on the U.S. market, the world’s largest, for its exports. The region has already started showing signs of recovery mainly because of government stimulus spending, domestic consumption and intra-regional trade, but recovery in the U.S. is important to sustain the gains.
The difference between the yields on two-year and 10-year U.S. Treasury notes reached a record 2.81 percentage points. It was last near these levels in 1992 and 2003, when the U.S. economy was pulling out of a recession and then staged a sustained recovery, the Journal notes. On both occasions, the U.S. Federal Reserve did not raise interest rates for a year or longer.
The gap could widen further. The previous peaks “didn't occur until the expansion was gaining some steam, and we don’t know yet that’s the case,” the Journal quotes Tony Crescenzi, a portfolio manager at Pacific Investment Management.



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