What is the Treasury Yield Curve

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Definition: The US Treasury yield curve compares the returns on short-term treasury bills versus long-term treasury bills and bonds. The US Treasury Department issues Treasury bills for less than a year. There are notes for two, three, five, and ten years. It issues bonds in 20 and 30 years. All government bonds are often referred to as "Notes" or "Treasurys".

The Treasury Department sets a fixed face value and interest rate for Treasuries.

It then sells them at auction. A high demand drives the price above face value. This reduces the return because the state only pays back the nominal value plus the specified interest rate. Low demand drives the price below face value. This increases the return because the buyer paid less for the bond but receives the same interest rate. Therefore, the yields always move in the opposite direction of the treasury bond prices. Government bond yields are constantly changing as they are resold in the open market on a daily basis.

The yield curve describes the yields for Treasury bills, notes and bonds. This is called a curve because if it were drawn on a graph, the returns would normally go up. That's because Treasury bills that are short-lived tend not to pay as high a return as the notes and even longer-term bonds. Why? Investors do not expect high returns in order to keep their money tied up for a short time.

However, they expect a higher return if they take their money out of circulation for 10 to 20 years.

It's hard to imagine someone buying a 30-year government bond and just ditching it, knowing full well that the return on their investment is only a few percentage points. But some investors are so concerned about losses that they are willing to forego a higher return on their investment in the stock market or real estate.

You know the federal government is not going to suspend the loan. In a world of uncertainty, many investors are willing to sacrifice a higher return for this guarantee. This is important even if investors don't buy and hold Treasuries. They resell them on the secondary market. That's where Treasury owners sell them to investors like pension funds, insurance companies, and pension funds.

Types of yield curves

There are three types of return curve. They tell you how investors fell on the economy. Because of this, they are a useful indicator of economic growth.

A normal yield curve is when investors are confident and shy away from long-term listings, which causes these returns to rise sharply. That is, they expect the economy to grow rapidly.

What does that mean for you? Mortgage rates and other loans follow the yield curve; if there is a normal yield curve, a 30-year fixed-rate mortgage will require you to pay much higher interest than a 15-year mortgage. If you can swing the payments, you will be better off in the long run trying to qualify for the 15 year mortgage.

A flat yield curve is when returns are low across the board. It shows that investors expect slow growth.

It could also mean that economic indicators are sending mixed messages, with some investors expecting growth while others aren't so sure.

If the yield curve is flat, you won't save that much on a 15 year mortgage. You could also take the 30 year loan and invest the savings for your retirement. Better still, use the savings against the principle and look to the day when you can freely and clearly own your home.

A flat yield curve means banks are unlikely to be lending as much as they should. Why? You won't get much more return for the risks of five, ten, or fifteen years of lending money. Therefore, they only lend to low-risk customers. They are more able to save their excess funds in low risk money market instruments and treasury bills.

Here is an example of the conditions that create a flat yield curve.

In 2012 the economy grew at a healthy rate of 2 percent. However, the debt crisis in the eurozone created great uncertainty. When the monthly job report fell below expectations, panicked investors sold stocks and bought treasuries. On June 1, 2012, the 10-year Treasury Note hit a 200-year low in intraday trading. A month later, on July 24th, it went even deeper.

On July 1, 2016, the 10-year Treasury yield in intraday trading hit a record low of 1,385. Investors worried about the UK's vote to leave the European Union. At that point, the yield curve was even flatter than it was in 2012. That's because investors weren't very confident about future growth. It's also because the Fed raised the Fed funds rate in December 2015. That forced the return on short-term Treasury Bills.

Since then, the yield curve has normalized. The economy is improving, and investors are instead selling treasuries and buying stocks.

Treasury Security Return at Close
6/1/12 7/25/12 7/1/2016 6/14/2017
1 month bill 0. 03 0. 08 0. 24 0. 90
Three-month bill 0. 07 0. 10 999 0. 28 999 01 6-month bill 0. 12
0.14 0. 37 1. 12 1 year notice 0, 17 0, 17 0, 45 1. 20 2 year note
0. 25 0. 22 0. 59 1. 35 3-year grade 0. 34
0. 28 0. 71 1. 48 5-year grade 0, 62 0. 56 1,00 1. 74 7-year grade
0. 93 0. 91 1. 27 1. 96 10 year grade 1. 47 (200-year low)
1. 43 (new record low) 1. 46 (new intraday low of 1. 385)> 2. 15 20 year grade 2. 13 2. 11
1. 81 2.53 30 year bond 2, 53 2, 47 2, 24 2. 79
Here is an example of how the yield curve is used to predict economic growth. In July 2010, the flat yield curve prompted the US Federal Reserve Bank of Cleveland to forecast that the US economy would only grow by one percent this year. In fact, the economy grew 2.5 percent thanks to low interest rates, which increased demand. The yield curve had flattened due to fears of the Greek debt crisis. A inverted yield curve is given when the short-term returns are higher than the long-term returns. It is an unusual situation in which investors switch to short term more
Demand for yield than for the longer term notes and bonds. Why should this happen? They expect the economy to deteriorate in the next few years and then to improve in the long run. An inverse yield curve therefore usually predicts a recession. In fact, the yield curve fluctuated before the 2000 and 2008 recession.