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Interest rates for longer-maturity government bonds are finally rising, triggering concern that higher rates could derail the U.S. expansion.

The 10-year Treasury yield is currently at about 2.30%. That’s up about 60 basis points since September. Should this continue, Canadian mortgage rates could move off their lows and dampen the housing boom that has already slowed in formerly bubble-central Vancouver.

There, the overhang of condo inventory from the 2010 Olympic Village and weakening demand have driven down prices. CMHC’s tightening of mortgage terms has also contributed to the slowdown in housing. In 2006, qualifying Canadians could get mortgages with no money down and a 40-year amortization. No wonder the Bank of Canada continues to fret about the over-extended marginal homebuyer who could be financially distressed if interest rates rise. In the past four years, CMHC has tightened in three steps—to 30-year amortization and 5% down, with higher qualifying interest rates and greater restrictions on borrowing for investors. Additional tightening is possible and even likely as Ottawa continues to worry about an overheated housing market, especially in Toronto, and high household debt ratios. A more upbeat economic outlook in the U.S., along with less concern about the euro-zone debt crisis, has spurred the rise in interest rates, which accelerated when the FOMC this week issued a more bullish press statement.

This has dampened the expectation of further Fed easing through additional unsterilized quantitative easing. Adding to the Treasury selloff was the U.S. bank stress tests showing 15 of the 19 money-center banks tested passed with flying colours. Even before the results were made public, J.P. Morgan Chase hiked their dividend rates, with some other banks to follow. This could dampen commercial bank demand for Treasury securities that surged with the Fed’s easy-money policy and the still-weak U.S. economy. Banks have been risk averse, stockpiling reserves because of economic uncertainty and nervousness around the negative implications of Dodd-Frank regulation—especially the Volcker rule, which disallows proprietary trading among commercial banks—as well as enhanced Basel capital requirements. Bank stocks surged on the stress-test news. All was not rosy, however, as Citibank’s failing grade added to investor concern. Citibank wasn’t alone this week in suffering reputational damage. Goldman Sachs got another pie-in-the-face with the public resignation of formerly unknown Greg Smith.

The story made global headlines and quickly went viral as pundits speculate that the scandal could shake up the C-suite and cause a further exodus of talent. Even as firms downsize, the New York Times opines that Wall Street is facing a recruiting crisis as top young talent no longer hungers for a career in Investment Banking. Well before the Times publication of the resignation letter, Goldman’s reputational franchise had been badly damaged. More than that, bonuses were cut last year with weak earnings and the firm reported a fourth quarter loss, the first such loss since the firm went public 12 years ago. Goldman’s earnings prospects have dimmed because it is now a commercial bank forced to hive off their proprietary trading, a huge source of revenue in the past. As well, many of the complex derivative products that formerly sowed Goldman’s fortunes will now be moved to trade on exchanges, providing investors and regulators with greater transparency.

There is no going back. Goldman cannot give up its commercial banking license to avoid the new rules.

Having borrowed from the Fed during the crisis, they are under the auspices of Fed regulation forever more.

Bottom Line: The rise in interest rates will not be a drag on the U.S. economy, as rates remain low, especially mortgage rates, and the U.S. housing market has nowhere to go but up. Indeed, this year will be the first since the financial crisis that residential construction will contribute to growth. The Fed will no doubt continue with Operation Twist to keep a lid on mortgage rates until the jobless rate falls meaningfully further. The recent loan officers’ survey shows that U.S. banks are becoming more willing to make prime mortgage loans and have increased their loan-to-value ratios. This, combined with improving job growth and rock-bottom house prices, should keep the nascent housing uptick in train.