The interest rate on 10-year US Treasury bonds almost doub-led in six months, rising from 2.26 per cent last December to 3.98 per cent in mid-June, before de-creasing slightly in recent days. This sharp rise happened despite the Federal Reserve's quantitative easing policy aimed at lowering long-term rates by buying $300bn (€21bn, ￡18bn) of Treasuries and promising to buy more than $1,000bn of mortgage securities.

The higher Treasury bond interest rates have pulled up mortgage rates, especially since April. That has weakened aggregate demand by depressing home-buying and reducing house prices. The fall in house prices in the past six months cut household wealth by some $1,500bn, leading to lower consumer spending. The lower home prices also caused more defaults and weakened bank balance sheets.

There is no single reason for the sharp rise in rates, and what matters is not just how investors see the econ-omic future but also what they think other investors will come to believe. Someone may sell long-term Treasuries because he believes inflation will rise, or because he thinks others will soon sell bonds because they think inflation will rise.