Here is the way it was supposed to work: Uncle Sam would borrow and spend trillions of dollars to save the economy and the financial system, but interest rates would stay near rock-bottom and nobody would worry about the potential side effects of all that spending -- like, say, inflation or a devalued dollar.
Things aren't proceeding quite according to plan. The investors who are supposed to buy all of that new Treasury debt are rebelling, driving interest rates up.
That's exactly what the housing market doesn't need. The average 30-year mortgage rate rose to a six-month high of 5.29% this week from 4.91% the previous week, according to Freddie Mac.
And that was before Friday's big jump in Treasury bond yields, which are the benchmarks for many other interest rates, including home loan rates and municipal bond yields.
The 10-year Treasury note yield rocketed to 3.86%, up from 3.71% on Thursday and the highest since November.
Compared with the many financial catastrophes of the last nine months -- the failure of Lehman Bros., the partial nationalization of Citigroup Inc., the bankruptcy of General Motors Corp., etc. -- a 3.86% yield on a Treasury bond would hardly seem to rank as a national tragedy.
But it's the trend that's important here, and the broader implications. Even as Federal Reserve Chairman Ben S. Bernanke was on Capitol Hill this week warning that the U.S. risks borrowing its way into yet another crisis, Treasury Secretary Timothy F. Geithner was in China trying to assure the largest foreign owner of Treasury bonds that its investment was safe.
Yet with every tick higher in market yields, the value of China's $770 billion in Treasury holdings erodes.
In an editorial this week, the China Daily newspaper expressed fear that "Washington's mushrooming deficit, generated by the massive government borrowing to fuel its economic recovery plan . . . will undermine both the dollar and U.S. bonds."
Good thing Geithner left China before Friday, when Treasury yields soared after the government reported that the economy lost a net 345,000 jobs last month -- far less than the 520,000 that analysts, on average, had expected.
Even though the unemployment rate rose to a 25-year high of 9.4% from 8.9% in April because more people were looking for work, financial markets latched onto the job-loss figure as another sign that the recession is nearing its end.
