CAPITAL MARKET CONDITIONS ARE BECOMING MORE CONSISTENT WITH HISTORY
While we are not yet out of the woods, the consensus view is that we are near or at the bottom of this severe economic contraction.
Most economists eschew the prospects of a V-shaped recovery but foresee very slow improvement from the newly established base level of activity.
This realization is leading to capital market conditions that, if not normal, are at least more consistent with history. In the past month, the Treasury yield curve has steepened and risk premiums in the debt markets have narrowed. The 10-year Treasury yield has increased sharply from a low of 2.07 percent in December to 3.97 percent in mid-May. It looks like this is due to the unwinding of panic-driven flight to riskless assets, which followed the Lehman collapse. The 10-year Treasury yields are again comparable to levels for the first nine months of 2008. Importantly, this level of rates does not reflect heightened fears of inflation. The rapid increase in the money supply and the sharp increase in projected federal deficits are likely to stoke those fears and could lead to much higher Treasury rates as economic growth resumes.
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