Tag Archives: 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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Benchmark 10-year Treasury Yield

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Short term US Treasury yields reached their highest level since July 2007 last week, after new official data revealed the US economy is still coming in hot, reports Forbes Magazine.

The benchmark 10-year Treasury yield climbed to 3.87%, while the 2-year rate advanced to 4.669%. The one-year Treasury yields briefly hit 5%. The last time the it hit those levels was July 2007.

High yields affect the price of bonds, which are considered to be the ultimate safe investment. They’ve been sensitive to the new data on the US economy’s health, which isn’t behaving as the Fed expected.

The ten-year Treasury yields, which many use as a benchmark for the economy, hit their highest level since December 30.

Treasury yields are kind of a big deal. They influence how much it costs the US Government to borrow money, how much interest bond investors will get and the interest rates everyone pays on loans.

And the 10-year Treasury yield is the jewel in the crown. It’s used to measure mortgage rates and confidence in the market. If the yields are higher here, it could grind the housing market to even more of a halt.

  • Treasury yields hit new highs in February, with 10-year yields hitting 3.86% and two-year reaching 4.6%
  • The highs come after data on labor and prices showed the US economy still had a long way to go to get inflation down
  • 10-year vs. 2-year bond yields are currently in an inverted curve, which historically has predicted a future recession

An inverted yield curve happens when the shorter-term yields have higher returns than the long-term yields. An inverted curve has historically meant a recession is on the way, and that can be enough to scare off banks from lending.

Investors are worried that stubborn inflation will lead the Federal Reserve to keep raising rates and to keep rates higher for longer — which could tip the economy into a recession.

References:

  1. https://www.forbes.com/sites/qai/2023/02/20/treasury-yields-hit-new-heights-is-inflation-set-to-stick-around/amp/

The 10-Year Treasury Bond Yield

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

An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities, according to Investipedia. .

This 10-year bond signals investor confidence. The U.S Treasury sells bonds via auction and yields are set through a bidding process.5 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.

But when confidence is low, bond prices rise and yields fall, as there is more demand for this safe investment.

This confidence factor is also felt outside of the U.S. The geopolitical situations of other countries can affect U.S. government bond prices, as the U.S. is seen as safe haven for capital.

  • 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.

Changes in the 10-year Treasury yield tell long-term 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.

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

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. This ebb and flow ultimately creates the Treasury pricing market as people flock to (and then from) Treasuries based on the economic environment they find themselves in.

It’s important to remember, all U.S. Treasury securities are regarded as risk free—since they’re backed by the full faith and credit of the United States government, which has never defaulted on its debts.

When investors get worried about the economy and market risk, they look for safe investments that preserve capital, and Treasuries are among the safest investments out there.

One of the foundational principles of finance is that risk and return are correlated. When markets are booming and the economy is expanding, the appetite to take on risk and generate returns is high. Risk-free Treasuries become much less appealing because of their lower returns. Demand declines and Treasury notes sell at less than their face value.

References:

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