US Treasury Bond Yield Curve: An Indicator of the Economy’s Health

03/08/2023 16:31 • Daily Digest • 67 views

It is reported that for the first time since 1981, the yield of US two-year treasury bond is more than 100 basis points higher than that of 10-year treasury bond. The yield of two-year treasury bond was as high as 4.9974% in the session, more than 100 basis points higher than the 10-year yield. The last time the two-year yield was lower than the 10-year yield was in July last year. Fed Chairman Powell’s speech suggested that the terminal policy interest rate may need to be higher than previously expected. The interest rate swap contract price shows that the probability of raising interest rate by 50 basis points in March is slightly higher than that by 25 basis points.

The yield curve of 2-10 year US Treasuries was inverted by more than 100 basis points, breaking the record for more than 40 years

Analysis based on this information:

The US Treasury Bond Yield Curve indicates the difference between the interest rates of short-term and long-term government bonds. It is an essential tool used to assess the health of the US economy. The Yield Curve has been flat for several years, which means that the difference between short-term and long-term interest rates is minimal. However, in recent months, it has started to slope upwards, and this indicates a healthy economy.

This message reports that for the first time since 1981, the yield of the US two-year Treasury Bond is more than 100 basis points higher than that of the ten-year Treasury Bond. This means that investors are demanding a higher rate of return on short-term bonds than long-term bonds. Normally, long-term bonds offer higher returns because investors assume that the economy will continue to grow and the price of their bonds will increase over time. However, with the current economic uncertainty, investors are opting for shorter-term bonds, which are less risky.

One of the reasons for this shift in investor preference is the Federal Reserve’s recent announcement that they may raise the interest rate. Fed Chairman Powell’s speech suggested that the terminal policy interest rate may need to be higher than previously expected. This news has caused a significant impact on the yield curve since investors now believe that short-term bonds will offer higher returns in the future when interest rates rise.

Moreover, the interest rate swap contract price shows that the probability of raising interest rates by 50 basis points in March is slightly higher than that of raising them by 25 basis points. This also supports the view that short-term bonds will offer better returns in the future.

In conclusion, the Yield Curve is an essential tool that helps assess the health of the US economy. The current shift in the Yield Curve indicates that investors are preferring short-term bonds over long-term ones. This trend is driven by the current economic uncertainty and the possibility of the Federal Reserve raising interest rates. If this trend continues, it could be a signal of a healthy economy as investors are willing to invest in shorter-term bonds.

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