With longer term rates rising, we are trying to assess at what level we should become cautious. Housing market fragility remains evident, so there is clearly a point when mortgage rates climb high enough to cause home prices to resume their declines. It's hard to say what that exact level might be, but we think it is somewhere around 6.5% for a conventional 30-year fixed loan, which would roughly correspond with a 10-year Treasury yield of about 5% (assuming mortgage spreads widen a bit as government housing support is unwound). Needless to say, a spike in mortgage rates of this magnitude would be an unwelcome event, potentially triggering a 'double-dip' recession. Fortunately, the Fed is actively working to prevent just such a scenario, which is why we view a spike in rates as unlikely. With 10-year Treasury yields still nowhere near 5%, we think there is room for interest rates to climb somewhat higher without undue effects on housing or stocks.

David Fuller's view Some upward pressure is evident for long-dated government bond interest rates in many countries. Within the OECD, Australian 10-year yields are testing their June 2009 high and a decline beneath the last reaction low near 5.35% would be required to delay upward scope beyond a brief pause near current levels. Greek bond yields surged back to their January highs today indicating that the country's funding crisis is not over. UK yields appear to be holding near 4% despite quantitative easing. In contrast Euro-Bunds remain near the lower side of their range. Further quantitative easing would appear necessary to prevent US Treasury 10-year yields from breaking above the psychological 4% level.