Fed Governor Waller: Higher Bond Yields Reflect Stronger Growth Not Inflation

Higher yields on U.S. bonds are a good thing, Federal Reserve Governor Christopher Waller aid, arguing that they reflect stronger economic growth rather than rising concerns over inflation,

“If this is all because of higher growth, that’s a good thing,” Waller said at a Bloomberg event in Mumbai Tuesday. “I’d rather have higher growth and higher yields than low growth and low yields.”

Yields on 10-year U.S. Treasuries were falling on Tuesday, sliding 0.027 percentage point to 5.217. Despite the decline, yields are still near the highest yields in 24 years. Bond yields move in the opposite direction of bond prices, so a rising yield indicates falling prices for bonds.

Bond yields were held down for many years by Fed policy—including forward guidance that indicated the policy rate would stay low and large bond purchases by the central bank—and expectations that growth would be sluggish.

Waller, ​a member of the Fed’s Board of Governors, challenged the view held by some analysts that Iran-war and tariff-related inflation fears were pushing up yields.

“Inflation expectations are well anchored, ​so all of the build-up is not coming from an inflation premium,” Waller said. “That’s not where it’s coming from. So it is ​a factor of real growth. If you have real growth and real productivity and these investments are going to pay off, you are willing to pay more in terms of your interest costs.”

Waller said that concerns about high government debt around the world were also pushing up yields but he appeared to push back on the idea that this is a particular issue for the U.S.

“You have general fiscal concerns around the world. All governments, at least in advanced countries, are in not such a great state. And we’re seeing that in France right now,” Waller said. “Some of this is driving up yields in some countries, not necessarily related to the U.S.”

Competition with AI for investment is also driving up yields, Waller said. This was, however, a larger concern for non-U.S. borrowers who were losing access to funds and having to pay more interest on debt.  He pointed to a recent large debt issuance of very long-term debt by Google’s parent Alphabet that paid a hundred basis points more than U.S. Treasuries.

“Where do you want to hold? A hundred basis point premium for a Google bond that’s probably going to pay off. It’s not like they’re going to probably default,” Waller said.