Last week's rapid rise in interest rates sent a shot across the bow of the recovering U.S. economy. It was no accident the the rise in 10-year U.S. Treasury yields to 3.85% from 3.69% the week before occurred immediately after Congressional passage of the massive healthcare reform bill. Although the Congressional Budget Office scored it modestly deficit favorable, the real truth is that all of the medicare cuts and tax increases could have been used to reduce the deficit. Instead of cutting the deficit by $1 trillion over ten years, the resources will be used to finance a new entitlement program.
Remember the tax increases on high income earners and the medicare cuts were "low hanging fruit." The hard work lies ahead of us and the bond market now recognizes how difficult the task of deficit reduction will be. Thus interest rates will continue to rise and the nascent recovery will be put at risk.