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Rates Rise with Deficit and Inflation Concerns

Rising inflation expectations and concern that the U.S. government is still not serious about cutting the deficit hit Treasury prices last week.

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Interest rates skyrocketed last week after the tax cut extension was announced. The 10-year and 30-year Treasury bonds widened 28 and 15 basis points, respectively, over the course of the week.

Fears of rising inflation expectations and concern that the U.S. government is still not serious about cutting the deficit hit Treasury prices. The cut in Social Security payroll taxes is expected to help stimulate additional consumer spending and in turn provide faster GDP growth, which is increasing inflation expectations. Even PIMCO, the advocate of the "the new normal" paradigm, capitulated and increased its GDP forecast. PIMCO now expects GDP to grow 3%-3.5% year over year in the fourth quarter of 2011, compared with its prior forecast of 2%-2.5%.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.