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Sunday, June 3, 2012

What is the Treasury Yield Curve?

Yields have been pushed to historically low levels by the Federal Reserve, weak economic conditions, China pegging the Yuan, and a "flight-to-quality" as fears of Europe imploding increase.  One of the best ways to view this is with a graph of the Treasury yield curve:

Source: Barron's
The U.S. Treasury Yield Curve is a snapshot at a point in time of the yield-to-maturity of various maturity Treasury issues.  Issues that mature (i.e., pay back principal) in less than 1 year are called "bills," issues that mature between 1 year and 10 years are called "notes," and maturities out past 10 years are called "bonds."  Thus, the yield curve shows the yields on bills, notes, and bonds at a point in time.

As you can see in the graphic, the curve was upward sloping at each of the 3 dates shown.  Compared to a year ago and a month ago, Treasury yields were little changed for bills, (anchored by Federal Reserve policy) but fell sharply for notes and bonds.

Typically, an upward sloping yield curve presages an expanding economy because it is usually associated with an aggressive Fed policy.  Unfortunately, this hasn't been the case recently for the simple reason that, coming out of 2008, we didn't have so much a liquidity problem as a solvency problem.  Historically, liquidity problems have been solved by the Fed increasing the money supply and banks making loans with the resulting excess reserves.  Today, excess reserves are at record levels; but banks are still loaded with bad debts and are only cautiously beginning to lend.

The Treasury Yield Curve is a useful tool for quickly grasping the movement in rates over time.  If you are interested in looking at historical yield curves, go to Living Yield Curve.  Here you'll find periods where the curve was inverted, i.e., the yield on shorter maturities exceeded the rate on longer maturities. These were times when the Fed was following a tight monetary policy and usually resulted in a slower economy.

1 comment:

  1. Thanks for highlighting this. I think personal solvency (& liquidity) is so important and can result in a household crisis. It's too bad that we (society) don't treat debt as cautiously as some of the banks are doing now :-) It is always interesting to see the parallels between the macroeconomy and our personal economies.