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The 4% barrier

10-year Treasury yields are a great way to measure the market's degree of optimism. When they dropped to almost 2% at the end of 2008, they were telling us that the market was extraordinarily pessimistic, in fact terrified that we faced years of depression and deflation. At 3.7% today, the market now thinks that while depression is unlikely, the economy is still going to be plagued by years of weak growth. If 10-year T-bond yields rise above 4%, which I think is likely, that will be a good sign that the market is coming to accept that we have at least a decent recovery on our hands. At 5%, the market would be telling us that the outlook for the economy was becoming rather robust and/or inflation was clearly moving higher than the Fed's 1-2% target zone.

Higher interest rates are definitely not something to fear, at least for now. They would have to go much, much higher before they became a threat to growth, and by that time the economy would be a lot stronger than it is today.

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