Dr. Lorenz Weimann
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The sharp rise in public debt on the back of expansionary fiscal policy is being funded by the issue of government bonds. An oversupply of government bonds is pushing interest rates up.
At some point, the flooding of banks with liquidity and the Keynesian fiscal policy are going to stoke up inflation. Markets are anticipating this and are demanding a higher inflation component in interest rates.
Rising interest rates are merely a reflection that things are returning to normal. The financial market crisis had bloated demand for government bonds; as risk aversion fades, so too demand for government bonds. Yields return to normal levels again.
The rise in long-term interest rates accompanied by still very low short-term interest rates causes the yield curve to steepen. A steep yield curve serves as a good leading indicator for the economy, as it frequently precedes a robust economic upswing. Rising long-term interest rates are an expression of more upbeat earnings expectations among investors. Provided short-term interest rates remain low, this creates good refinancing conditions.