U.S. Treasury Yield Curve Analysis

Understanding the US Treasury yield curve serves many important functions. It is utilized as a benchmark for pricing of assets, provides clues to an uncertain future, and helps in predicting where the US economy is headed.

The above chart discloses the U.S. Treasury Yield Curve on October 1, 2012 (i.e., “as of 9/30”). It plots the relationship between interest rates shown on the vertical axis and bonds maturity dates on the horizontal axis or in other words the cost of borrowing in relation to the time of borrowing. On October 1. 2012 the US treasury yield curve has a typical upward slope from left to right and is otherwise known as the positive yield curve. An upward slope means that the bonds yield usually rises as the time to maturity lengthens. An upward slope is considered to be a “normal” since the greater risk should be compensated with higher rewards since longer maturities are exposed to more risks such as high inflation and the investor is unable to invest the money in other places for a longer period. An upward slope indicates that the financial markets are expecting the interest rates to rise in the future. It also reflects that the economy to grow in the future.
A major factor that affects the shape of the US treasury yield curve is the Federal Reserve interest rate policy. It directly influences the short end of yield curve by buying and selling short term treasures in order to enact changes in the monetary policy and by raising or lowering the Feds fund rate or the rate banks lend to each other. Although there is not a direct correlation with the Fed’s interest rate policy on the long end of the curve, the Fed is able to influence the longer- term interest rates. Not only does the Fed affect the Feds fund rate by increasing and decreasing the supply of money in circulation, but it affects the expectations of