Dow at 11,000 and Treasuries at 4%: To Be Loved Or Feared? Part 2

Last Updated Apr 8, 2010 10:10 AM EDT

The U.S. financial markets are hitting two milestones at once: the round numbers of 11,000 on the Dow Jones Industrial Average, which we saw last just before the Lehman Brothers failure, and a four percent yield on the U.S. 10-year Treasury bond. Of course, to the owners of financial assets, rising stocks are a good thing, while rising interest rates are not. Yet even on the progress of stocks, observers are not universally happy. To which of these passing milestones should we be paying heed, and is there anything to worry about?

A yield below four percent on the 10-year U.S. Treasury bond has been a rare sight indeed in the last 50 years. Trading below four percent in the early 1960s, the 10-year headed higher through the 1970s, and then soared in the 1980s, topping out over 15 percent. It passed under four percent during the easy money of the 2000 recession, and again as the Fed flooded the economy after the Lehman crisis. This week the 10-year touched four percent on its way up.

What's going on? Are rates rising from improvement in the economy? Or the markets demanding higher rates in fear of inflation and credit downgrades from the government flooding a struggling economy with too much money?

I'm getting to this later than I wanted to; four percent happened Tuesday, and today a weak unemployment report has sent the 10-year back to 3.85 percent or so. We'll consider the 10-year in another post tomorrow, but in the meantime, here's a graph of the last 50 years.