The yield curve is one of the paramount statistics for investors and policy makers to consider, yet as true with many things, it doesn’t mean all that much to me unless I can visualize it in a compelling format.
First, I gathered 15 years of daily treasury data for short-term and long-term government bills to chart this data in a meaningful way. Then, I read that R, as a coding language, had a lot of the capabilities I needed to chart this and I wanted to learn the language anyway, so I decided to give it a go. After some trial and error, this is what I came up with. Hope this helps you to gain a clearer picture of the current state of our economy as it did for me.
The yield curve shows how much it costs the federal government to borrow money for a given amount of time, revealing the relationship between long- and short-term interest rates.
It is, inherently, a forecast for what the economy holds in the future — how much inflation there will be, for example, and how healthy growth will be over the years ahead — all embodied in the price of money today, tomorrow and many years from now.
When the yield curve flattens, it is a sign that investors expect mediocre growth in the years ahead.
The last time the Fed started raising rates was in 2004. From 2004 to 2006, short-term rates rose steadily. But long-term rates didn’t rise very much.
Alan Greenspan, the Federal Reserve chairman at the time, called this phenomenon a “conundrum,” and it raised questions about the ability of the Fed to guide the economy. Part of the reason long-term rates failed to rise was because of strong foreign demand.
Foreign buyers have helped keep long-term rates low recently, too — as have new rules encouraging banks to hold government debt and expectations that economic growth could be weak for a long time.
Short-term treasuries reacted in late 2013 when Congress threatened to let the country default, which is apparent by the jetting black line in 2014.
The 10-year Treasury yield was as low as it has ever been in July 2012 and has risen only modestly since.
Some economists refer to the economic pessimism as “the new normal.”
This “new normal” will continue to push yield-starved fixed income investors into new asset classes in search for returns.
I will chart this again when the Fed raises rates again, late this year, or so some of us believe.