US yield curve

watching the evolution of the risk-free yield curve in US

How is the US yield curve moving?

In summary

• the US yield curve right now is relatively steep across maturities

Implications:

• investors seem to expect higher inflation and economic growth with subsequent monetary tightening

Evolution since last month:

• its starting point has moved up vs a month ago
• it the short-end (0-2 yrs) has turned steeper, as investors now expect less support/tighter monetary policy at later maturities
• the medium-end (2-10 yrs) is now flatter, as investors see little change in monetary policy for the period
• the long-end (10-30+ yrs) has not changed meaningfully

IntroA yield curve is a line that plots bond yields (a proxy of expected interest rates). The plotted yields come from bonds with equal credit quality, same government issuer but different maturity dates. The slope of the yield curve predicts the direction of interest rates and the economic expansion or contraction that could result, according to the current expectations of bond investors.

ShapesYield curves have three main shapes: normal upward-sloping, inverted downward-sloping, and flat.

Normal curves are upward-sloping, and point to economic expansion. Downward-sloping curves point to economic recession. Flat curves point to stagnation.

Chart guideIn the chart above we can observe the current US Treasury yield curve and compare it against its shape a month ago, or three months ago. The evolution of the curve is a good summary of any change in bond investors' views of expected growth, inflation and subsequent monetary policy changes by the Fed.

US Treasury yield curve differentials

monitoring possible curve inversions

is there any major recession risk on the horizon?

Focusing on the 10-year minus 2-year segment

• such curve differential is positive and normal, with later maturities paying more than shorter maturities
• it has flattened in the last week

Implications:

• No recession signal here

IntroA yield curve differential is the difference in yield between two bonds from the same issuer - the US government in this case - with different maturities. It's a key indicator in financial markets used to gauge investor expectations about future interest rates and economic growth, including recessions.

ShapesTypically, longer-term bonds have higher yields than shorter-term bonds, resulting in an upward-sloping yield curve. When short-term yields are higher than long-term yields, the yield curve inverts. This is often seen as a potential signal of an impending economic recession.

10yr - 3m is a better indicatorMarket participants tend to commonly monitor the differential between 10-year and 2-year bonds. Still, it has been demonstrated that the differential between 10-year and 3-month bond (a closer proxy to immediate central bank rate changes) works as a better indicator of recessions, or changes in rates and economic growth more in general.

RecessionsHistorically, an inversion in the yield curve has pointed out to a recession to start within 12/24 months. As soon as the inverted yield curve re-steepens, a recession would be normally imminent.

But watch out: it has been observed in 2023 and 2024 that this rule is not golden. Any major changes in interest rates emerging from environments of hyperinflation can alter yield curve differentials massively without leading to a recession.