The debate over what the rise in the Treasury bond yield tells us about the economy is hobbled by the fact that too many of those looking for signals from the credit markets have not fully digested the effect of the implicit guarantee of financial corporate debt.

Here’s the problem. Ordinarily, a shift of assets away from Treasury bonds toward privately-issued bonds signals a growing appetite for risk and yield, which might indicate either inflation fears or hopes or economic recovery. But the huge shift we’re seeing now (see the chart below, and Northern Trust economist Paul Kasriel’s analysis this morning) might signal something else entirely: that the market is pricing in the implicit government guarantee of the debt of financial companies. So instead of a shift away from risk-free assets, we may be seeing a shift between different classes of risk free assets.

This isn’t just a theoretic possibility. It’s something that is actually on the minds of asset managers. As early as January, asset manager Eric Roseman was advocating purchasing the corporate bonds of financial companies on this very basis.

“Even the largest financial services companies or banks are now backstopped by the federal government,” Roseman wrote. “Spreads on these bonds are even wider than non-financial corporate debt and have the implicit guarantee of Uncle Sam since October.”

With this is mind, at least part of Kasriel’s chart can be seen not as an indicator of the growth of risk appetite but as the narrowing of the spread between Treasury bonds and implicitly backed government debt. (In a follow-up post, we'll explain how the implicit guarantee of financial companies may also be corrupting the signals from the broader corporate debt market and the stock market as well.) To put it differently, the market now views all large, complex financial companies as it once viewed Fannie Mae and Freddie Mac.