In my recent paper I have wondered why long term interest rates have risen? Is it becuase of high fiscal deficit? Better economic prospects (as Krugman points)? Or is it because of high inflation ahead?
In a new short note, Daniel Thornton of St Louis Fed says:
Together these figures suggest that the recent rise in long-term yields is due to heightened expectations for inflation and a rise in real rates. For example, the nominal yield on 10-year coupon bonds increased nearly 115 basis points between March 18 and June 17. Over this same period, estimates of the real rate (see Figure 3) indicate that the real 10-year yield has increased about 50 basis points and 10-year inflation expectations (see Figure 2) have increased by about 60 basis points. The rise in real rates likely reflects improved expectations about the real economy. The rise in inflation expectations likely reflects (i) the fact that several inflation measures have risen recently and (ii) concerns that the recent marked increase and expected future increases in the monetary base will ultimately lead to higher inflation.
So it is because of a bit of everything. Though, he does not discuss any role of high deficit/public debt in rise of yields.