The bond market's holiday rally is excellent news for the housing market and the US debt mountain, Nobel economist Paul Krugman says

"Never mind the stock market; the rising bond market has given us a holiday gift, and a reason to be more optimistic about next year."

• The holiday rally in bonds is good news for the US economy, according to Paul Krugman.
• The top economist pointed to falling bond yields in recent weeks.
• Lower yields spell good news for areas like housing, thanks to the impact of lower borrowing costs.

The massive rally in bonds is excellent news for the housing market and the enormous US debt pile, according to Nobel laureate Paul Krugman.

The top economist pointed to the recent jump in bond prices and slump in yields. For instance, the yield on the 10-year US Treasury has plunged more than a full percentage point from its peak in October, slipping to around 3.9% on Friday. 

Meanwhile, the iShares 20-Year Treasury Bond exchange-traded fund has soared over 20% from levels since late October, indicating long-dated Treasury bonds have officially entered a bull market. 

"Never mind the stock market; the rising bond market has given us a holiday gift, and a reason to be more optimistic about next year," Krugman said in an op-ed for the New York Times on Friday.

Lower interest rates spell good news all around, he said, due to the havoc high rates can wreak on the economy.

He pointed to sectors that are sensitive to the effects of borrowing costs, such as the US housing market. High mortgage rates have sent activity grinding to a near halt this year as buyers and sellers stayed on the sidelines.

But conditions appear to have improved as bond yields ticked lower, which have helped send the 30-year fixed mortgage rate below 7% after hitting 8% in October. Meanwhile, existing home sales rose 0.8% last month, National Association of Realtors data shows – a possible sign a rebound could be forming in the housing sector.

Lower interest rates are also good news for the enormous US debt load, which topped $33 trillion for the first time ever this year, because the burden of interest payments eases as interest rates tread lower.

"The cost of US government borrowing has a big impact on the federal fiscal outlook, which isn't healthy but looks less dire than it did two months ago," Krugman said.

The bond market rally coincided with growing optimism on Wall Street that the Fed will slash rates several times next year as inflation heads toward policymakers' 2% goal.

But investors could be getting ahead of themselves by pricing in such hefty declines, some strategists warn. The era of ultra-low interest rates could be over, BlackRock strategists previously warned, as rates risk staying higher for longer with inflationary pressures lingering in the economy.