The Best Yield Curve Tutorial You've Ever Read
The two year has remained relatively flat since this week's open. However it did gap up significantly. Why is the 30 year falling (see linked article) while the two year remains consistent?
Bonds of different maturities care about different things. In particular, the shorter end of the spectrum cares less about the long term effects of inflation and the general position in the economic cycle than the long end. Why? Those effects will be felt less in two years than the short term effects of interest rate decisions or the sentiment about it.
Conversely, the 30 year has more time to price in these factors. It has to take in the considerations above, and more. Hence why the 30 year is tumbling right now, as it's more sensitive to risk sentiment and longer term factors.
Don't forget that bonds are fixed income products, meaning they pay a yield that is inversely proportional to the price. The difference between the yield at either end of the spectrum is commonly referred to as the yield curve. The yield curve could also refer to a plot of the set of all yields on treasury products of various maturities.
The difference between the two ends could narrow, or flatten. It could also steepen. Furthermore, that flattening or steepening could be driven by either end. In this case it is led by the long end. Since prices are decreasing (on account of risk on sentiment), we call this a long end led bear steepener.
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Bonds of different maturities care about different things. In particular, the shorter end of the spectrum cares less about the long term effects of inflation and the general position in the economic cycle than the long end. Why? Those effects will be felt less in two years than the short term effects of interest rate decisions or the sentiment about it.
Conversely, the 30 year has more time to price in these factors. It has to take in the considerations above, and more. Hence why the 30 year is tumbling right now, as it's more sensitive to risk sentiment and longer term factors.
Don't forget that bonds are fixed income products, meaning they pay a yield that is inversely proportional to the price. The difference between the yield at either end of the spectrum is commonly referred to as the yield curve. The yield curve could also refer to a plot of the set of all yields on treasury products of various maturities.
The difference between the two ends could narrow, or flatten. It could also steepen. Furthermore, that flattening or steepening could be driven by either end. In this case it is led by the long end. Since prices are decreasing (on account of risk on sentiment), we call this a long end led bear steepener.
If you liked this analysis, subscribe for more content. Also check us out at Ghost Squawk!
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