Fears about the economy, in short, have often driven people out of stocks and into Treasury bonds. Falling stocks prices have often been associated with falling bond yields. So how can anyone now feign surprise when good news for the economy has the opposite effect -- raising both stock prices and bond yields?
When long-term rates rise more than short-term rates, that is called a steepening of the yield curve. Such steepening of the yield curve is one of the most reliable tools economists have for predicting an improving economy. For one thing, a wider spread between rates on loans and deposits makes banks less timid about lending to small businesses.
Back in March, when Grant began worrying about rising bond yields, he imagined the bond market feared higher inflation. But that explanation is inconsistent with the rise in stock prices and, more recently, in the dollar. The stock market hates inflation, and the dollar generally goes down with inflation, not up.
The real reasons long-term rates recently backed up a bit were (1) they had been astonishingly low, and (2) expectations of better business profits normally bid up real, inflation-adjusted rates. Higher interest rates can push price-earnings ratios down, but the beneficial impact of higher earnings is far more critical for stocks.
Journalists have revived Grant's other idea, that a higher mortgage rate "imperils the glorious mortgage refinancing boom." As someone who recently refinanced at 5 percent, I can confirm that I am certainly not planning on doing that again. Yet the glorious effects will nonetheless persist for years and years. Most who could benefit significantly from refinancing have done so, reducing their monthly living costs by several hundreds of dollars well into the distant future. This was no mere short-term "stimulus" that could now suddenly vanish unless there was more and more refinancing. On the contrary, refinancing has greatly reduced the burden of past debts and increased the share of future income left for consumption and investment.
Because most mortgages are fixed for many years, so are the benefits from refinancing. One little-noticed benefit even accrues to federal and state governments: Many taxpayers with smaller mortgage interest bills will now be claiming smaller tax deductions. That is one of many reasons I believe future deficit projections are too pessimistic.
A smart thing to do with some of that cash saved by refinancing would be to buy stocks on dips. The Moscow Times recently quoted the late J. Paul Getty to the effect that people do not buy stocks when prices are low because "they are fearful of bargains."
Many Americans who were excessively fearful of stock market bargains this spring ended up holding too many Treasury bonds at too low an interest rate. It was and is a far wiser idea to ignore all the gloomy financial writers with all their second-hand excuses for missing the market's turn and pick up some bargain shares in this accelerating American economy.