The 10-year yield closed at 5.11% today. The highest since 2007.
A lot was made of the move, 14 basis points on the day, the biggest since April of last year.
Here's what that looks like against every trading day since 1999.
As you can see, it's not an extraordinary move in yields.
What about in percent?
Not extraordinary.
But the level? It's 5.11%. A nineteen year high.
That said, the Atlanta Fed's running estimate now has the economy growing 5.1% in the third quarter, in real terms. Add inflation, and nominal growth is running north of 8%.
So, the U.S. borrows at 5 and grows at 8. When an economy grows faster than its government's borrowing rate, the debt burden shrinks relative to the economy.
When the 10-year was trading above 5% in 2007, nominal growth was under 5. So, same yield but different economy.
This is what Warsh has been describing since he took the chair. The global savings glut is over. It's been replaced by a global investment surge. Rates are high because capital is being competed for, not because the Fed is choking anything.
And if we look back at the 1997 analogue we talked about last week: Greenspan hiked into strong growth and rising productivity. It didn't stop the boom.
Now, let's compare the above to what's happening in Europe.
The ECB's own projection has Europe growing just 0.9% this year.
Add inflation at 3%, and nominal growth is about 4. The German 10-year closed today at 3.57%. Germany borrows at its growth rate.
Italy borrows at 4.5%, with growth near zero, on a debt stock of 135% of GDP. Its nominal growth is 3, maybe 3.5. Its borrowing cost is a full point above it.
The U.S. has three points of room. Italy has a point of deficit. That's a debt burden shrinking relative to the economy, versus a debt burden growing.
There's a study on this that looks at sixteen countries over a 145-year period (here). For most of those 145 years, governments borrowed below the rate their economies grew. That's what makes sovereign debt sustainable.
In the case of Italy, through the 1980s and early 1990s it borrowed above its growth rate. Its debt went from roughly 55% of GDP to roughly 100%. It ended with the lira forced out of the European exchange rate system.
Italy is back in that configuration.
