Tag Archives: U.S. Treasury Yield

Inverted Yield Curve and the U.S. Treasury 10 Year

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Given the inverted yield curve and its correlation to predicting recessions, the risk of recession is still elevated, explains Collin. The yield curve is inverted when long-term treasury yields fall below short-term treasury yields.

For example, the 10-year treasury yield is about 3-1/2% %, but the two-year treasury yield is about 4%. And the yield curve tends to invert once the markets begin pricing in Fed rate cuts and tends to send long-term yields lower. Long-term yields like that 10-year treasury yield are often based on Fed Funds Rate expectations over the next 10 years or so. So if the Fed Funds Rate is 5% like it is today, but the Fed Funds Rate is expected to be lower in a year or two, you’ll tend to see longer term yields decline to sort of average out what the Fed Funds Rate might be over the next number of years.

An inverted yield curve is usually followed by a recession. When the Fed hikes rates, it often slows growth along with inflation. It doesn’t necessarily just bring inflation down. When the Fed hikes rates, things in the economy and financial markets tend to break. Maybe the economy slows, maybe corporate defaults pick up, but any way you slice it, there can be negative consequences from Fed rate hikes. So when things break, the Fed then tends to cut rates to stimulate the economy, which can un-invert the yield curve. For example, short-term Treasury bills or treasury notes could fall if and when the Fed cuts rates and they tend to fall below that level of long-term yields.

Now, we think that’s what’s led to the yield curve being less inverted now, it’s really just due to expectations of sooner than expected rate cuts, so short-term rates have fallen more than long-term yields have declined. But if an inverted yield curve is usually followed by a recession, that doesn’t mean that the fact that the yield curve is becoming less inverted is sending a positive signal about the economy.

Just the presence of rate cut expectations tells us that the likelihood of a recession is on the rise, mainly because the Fed cuts rates when they need to, when they need to stimulate the economy. And we think, unfortunately, the Fed will tighten enough right now, not just to slow inflation, but they’ll likely weaken the labor market, which can lead to slower consumer spending, and then the risk of recession is still there.

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This 10-year Treasury Yield

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The 10-year Treasury yield is closely watched as an indicator of broader investor confidence.

The U.S. Treasury 10-year note yield signals investor confidence in the overall economy and markets. Investors pay keen attention to movements in 10-year Treasury yields because they serve as a benchmark for other borrowing rates, such as mortgage rates. When the 10-year yield fluctuates, it can have significant implications across the financial landscape, according to Forbes.

The U.S. Treasury issues 10-year T-notes at a face value of $1,000, and a coupon specifying a certain amount of interest to be paid every six months. The notes are sold through auctions conducted by the Federal Reserve and yields are set through a bidding process. The notes can be resold to other investors in the secondary market.

Changes in the 10-year Treasury yield tell investors a great deal about the economic landscape and global market sentiment. Professional investors analyze patterns in 10-year Treasury yields and make predictions about how yields will move over time.

When confidence is high, prices for the 10-year drop and yields rise. This is because investors feel they can find higher-returning investments elsewhere and do not feel they need to play it safe. Thus, gains in yield signal global economic confidence

Declines in the 10-year Treasury yield generally indicate caution about global economic conditions.

  • BecauseTreasury securities are backed by the U.S. government, They securities are seen as a safer investment relative to stocks.
  • Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
  • The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.
  • A rising yield indicates falling demand for Treasury bonds, which means investors prefer higher-risk, higher-reward investments. A falling yield suggests the opposite.

The yield is the rate that people refer to when they’re talking about Treasuries. The coupon rate, while technically the interest rate you will receive in relation to the Treasury’s face value, will likely be different from the effective yield you end up getting. If you pay less than face value, your effective rate will be higher; more and it will be lower.

Prices (and therefore effective yields) change for bonds almost constantly. That’s because a bond’s price is inversely related to yield: When demand is high and Treasury prices rise, yields fall—conversely, when demand is low Treasury prices fall and yields rise.

Rising yields may signal that investors are looking for higher return investments but could also spook investors who fear that the rising rates could draw capital away from the stock market.

References:

  1. https://www.forbes.com/advisor/investing/10-year-treasury-yield/

Rising Bond Yield Leads to Market Sell-off | CNBC

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The culprit behind the recent stock market sell-off was the rapid rise in 10-Year U.S. Treasury bond yields. The 10-year Treasury yield remained above 1.4%, after surging to 1.6% in the previous day session to its highest level since February 2021 and more than 0.5% higher since the end of January, according to CNBC.

The spike in the 10-year yield , which is used as a benchmark for mortgage rates and auto loans, is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead. The sheer pace of the rise has also had the effect of dampening investors’ appetite for richly valued areas of the market like technology and other growth stocks. Higher rates reduce the value of future cash flows so they can have the effect of compressing equity valuations.

All three stock benchmarks — Dow Jones Industrial Average , Nasdaq and S&P500 — were tracking for weekly losses ahead of the final trading day of February. The Nasdaq was down nearly 7% from its February 12, 2021, record closing high. The Dow and S&P 500 both remain solidly in the green for the month. However, the S&P 500 was off almost 2.7% from its last record closing high, also on February 12, 2021, and the Dow had its worst day in nearly a month on Thursday.

Additionally, inflation concerns are being stoked on the thought that the $1.9 trillion COVID-19 stimulus bill — which passed the House of Representatives — on top of accelerating growth could overheat the economy.

Economists and investment managers say the bond market is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead.

References:

  1. https://www.cnbc.com/2021/02/26/5-things-to-know-before-the-stock-market-opens-feb-26-2021.html