Treasury Yield Curve
The Treasury yield curve shows the term structure of interest rates. What this means in laymen’s terms is that it shows interest rates for U.S. Treasuries for every maturity from 3-month to 30-years.
The “Risk-Free” Rate
The Treasury yield curve is interesting to both economists and investors because U.S. Treasuries are considered to be without risk of default. Treasury rates are called “risk-free rates”. Treasuries are debt instruments issued by the United States Treasury Department. People or institutions that buy Treasuries are lending money to the United States government. Treasuries securities are rated AAA (the highest rating) because the U.S. government can use all its taxing authority to collect money from its citizens to make interest and principle payments. You often hear that U.S. Treasuries are “backed by the full faith and credit of the United States.”
There is, in fact, some tiny risk with Treasuries. For instance, the present government could be overthrown by a revolution and the new government might refuse to honor the debts of the former government. This has happened in plenty of other countries like Russia in 1817 after the Bolshevik revolution. However, the convention is that Treasuries are risk free.
Bills, Notes and Bonds
Treasuries of one year or less are called Treasury bills (T-bills), greater than one year up to ten years are called Treasury notes, and more than ten years are called Treasury bonds. Sometimes people just use “bonds” to mean any of the Treasury bills, notes or bonds. They all fall under the category of “fixed income”. Sometimes people say nominal bonds to distinguish them from inflation-protected Treasuries called TIPS.
You can look up the Treasury Yield Curve on Bloomburg.com Government Bonds page. There is a table showing the current prices and yields, plus a chart of the yield curve.
Dynamic Yield Curve
Knowing what today’s yield curve looks like is useful, but suppose you wanted to know what the yield curve was a year ago or five years ago. Here is a nifty tool that shows how the yield curve varied over time.
Dynamic Yield Curve at StockCharts.com
Normal and Inverted Yield Curves
For the most part, interest rates are set in the bond market according to supply and demand just like anything else that trades in a market. Normally the yield curve is sloped upward from left to right, i.e. longer maturities have higher interest rates. This means bond investors demand a higher rate for lending money out for longer terms. There are various theories why this is the case, such as Expectations Theory, that we will discuss in another article.
Observe that both the level and the steepness of the yield curve varies over time–at some times it is steeper than at other times. There are times when it is almost flat meaning investor will accept the same rate no matter what the maturity. There are even times when the yield curve is inverted which means that shorter terms have higher rates than longer terms. There has been academic research about what that means. Many have evidence that an inverted yield curve forecasts an economic recessions. The evidence is not conclusive and more research is needed. We’ll write an article on the fascinating subject of using the yield curve for economic forecasting.
Here are a few more useful charts:
3-Month Treasury Yield
2-Year Treasury Yield
5-Year Treasury Yield
7-Year Treasury Yield
10-Year Treasury Yield
20-Year Treasury Yield
30-Year Treasury Yield