Why Liberals See Rising Bond Yields as Bad News
The reaction to the rise in longer-term bond yields from many in the financial media has been overwhelmingly negative. The question is why?
The financial press has repeatedly described bond yields as rising because of investor “anxiety” over inflation or the size of the U.S. government’s debt. “Bond market anxiety raises stakes for Warsh’s debut Jackson Hole speech,” Reuters reported Monday, insisting that the bond market has decided that the Fed has to hike to stave off inflation and protect its credibility.
This is largely an imagined anxiety. The rise in bond yields is not primarily a reflection of increased inflation expectations. We can tell how much of the yield is due to required inflation compensation by looking at the so-called “breakeven rate,” the difference between the yield on an ordinary 10-year Treasury and the yield on a 10-year inflation-protected Treasury, or TIPS. This represents the average inflation rate over the next decade at which investors would earn roughly the same return from either security, hence the breakeven rate.
The breakeven is currently around 2.34 percent, which is broadly consistent with the Fed’s two percent inflation target because CPI generally runs a few tenths of a percentage point above the Fed’s preferred PCE measure. This is just nine basis points higher than it was at the start of the year and five basis points below the year-ago breakeven rate.
The rise in yields is coming from the other side of the bond universe, what is known as the real yield. This is what investors require as compensation for locking money up in a longterm bond rather than investing in other financial assets. Real yields tend to rise when other investments are seen as increasingly attractive. Investors demand more compensation for the opportunity cost of holding bonds. More broadly, real yields rise when the economic outlook improves.
This is not some kind of complex or heterodox financial formula. It’s so basic that the fact that it has repeatedly escaped the attention of usually diligent financial journalists requires an explanation.
Liberalism: The Party of American Despair
The most convincing answer is also the simplest: liberal despair. Many liberals have taken on a deeply pessimistic view of the U.S. and its economy. If your deepest conviction is that we’re headed to hell in a handbasket, every turn of events looks like a step toward the abyss.
The detection of despair of liberals does not require mind reading or a degree in psychology. Rather, it is evident in survey after survey of liberal opinion. Last week, for example, the Economist/YouGov poll asked American adults: “Do you personally feel that the American Dream is alive today or not?” Sixty-three percent of self-described moderates said the American dream was very much or somewhat alive. Seventy-seven percent of conservatives also chose either very much or somewhat alive.
Among liberals, however, only 34 percent see any life remaining in the American dream. Sixty-six percent say the American dream is “not really alive.”
If we look at the aggregate figures, 57 percent of Americans think the American dream is very much or somewhat alive. Forty-three percent say it is not really alive, which means that liberals are seriously out of sync with broad public opinion on the question of the survival of the American dream.
Perhaps surprisingly, liberals are much more pessimistic than young people, who are often described as being in the worst financial position in today’s economy. Fifty-nine percent of young people see the American dream as very much or somewhat alive.
The same survey also asked about 13 different things that could be considered a threat to the American dream, asking Americans to rate them as severe threats, somewhat threatening, or not at all threatening. The threat scoring the highest percentage of liberals saying it is a severe threat to the American dream is inflation, at 82 percent. That outranks climate change, cutbacks in government social welfare programs, and deteriorating education, all traditional areas of liberal concern.
It is no wonder, then, that despairing liberals in the financial media see rising bond yields as a sign of inflation anxiety. It’s a conclusion that seems inescapable given their grim view of the American dream and the centrality of inflation to that pessimism.
