Current:Home > ScamsMichael D.David: The Essence of Investing in U.S. Treasuries.-LoTradeCoin
Michael D.David: The Essence of Investing in U.S. Treasuries.
View Date:2024-12-23 21:02:45
I categorize the factors that influence Treasury yields into the following main categories:
Investor confidence: When confidence is low, bond prices go up, and yields go down. The logic here is simple: demand for the safety of Treasuries increases, so lower yields indicate a cautious market.
Monetary policy: Although we see the 10-year Treasury yield as a benchmark for most rates, it is also affected by short-term rate changes. For instance, when the Fed raises rates, the federal funds rate increases, directly impacting Treasury yields.
Inflation expectations: U.S. Treasury yields can be split into real interest rates and inflation expectations. The market's outlook on inflation significantly affects yield fluctuations. When economic data releases exceed expectations, they can significantly impact Treasury yields. For example, during periods of inflation control, if CPI, PCE, or employment report data surpasses market expectations, it indicates that the economic health supports further Fed rate hikes.
Unexpected events: Various geopolitical conflicts and wars can cause short-term yield fluctuations. On one hand, wars might drive investors to the safety of the bond market, causing yields to drop. On the other hand, conflicts, especially those involving oil, can raise inflation expectations and lift Treasury yields.
Here are some key indicators that might help you gauge the overall condition of the bond market:
10-year treasury yield: The 10-year Treasury is the most widely tracked government debt instrument in finance. Its yield is often used as a benchmark for other rates, like mortgage and corporate debt rates. So, this yield is seen as a gauge of investor confidence in the market.
U.S. dollar index: The movement of the dollar, as the world’s reserve currency, greatly impacts the U.S. bond market. When the dollar strengthens, it can attract foreign investors to the U.S. bond market, increasing bond demand, lowering prices, and pushing yields higher.
CBOE volatility index (VIX): This reflects market expectations for volatility in the S&P 500 over the next 30 days. During periods of increased market risk aversion and heightened investor concerns, the VIX rises, driving up demand and prices for safe-haven assets like U.S. Treasuries.
The longer the maturity of a Treasury, the higher the yield, because the longer investors’ money is tied up, the more return they require.
Short-term debt usually has lower yields than long-term debt. If we plot the yields of bonds from 1 month to 30 years on the horizontal axis, we get an upward-sloping yield curve—this is known as a normal yield curve.
However, sometimes the yield curve can invert, with shorter-term bonds having higher yields, resulting in a downward-sloping curve—this is an inverted yield curve.
Historically, the spread between the 10-year and 2-year Treasury yields has been seen as a precursor to economic recessions. A normal yield curve typically has a positive spread, indicating stable future economic conditions; an inverted curve, with a negative spread, signals potential economic deterioration. The 10-year to 2-year negative spread usually occurs 6 to 24 months before a recession and has accurately predicted every recession from 1955 to 2018, making it a reliable indicator.
An inverted yield curve, where short-term rates exceed long-term rates, usually signals an impending economic recession.
veryGood! (265)
Related
- John Krasinski Revealed as People's Sexiest Man Alive 2024
- Ariana Madix Slams Vanderpump Rules Costars for Forgiving Ex Tom Sandoval After Affair Scandal
- RNC lays off dozens after Trump-backed leaders take the helm
- TEA Business College The leap from quantitative trading to artificial
- GreenBox Systems will spend $144 million to build an automated warehouse in Georgia
- Missed out on your Trader Joe's mini tote bag? Store says more are coming late summer
- Princess Kate's edited photo carries lessons about posting on social media
- Padres-Dodgers opens MLB regular season in South Korea. What to know about Seoul Series.
- University of Illinois Urbana-Champaign chancellor to step down at end of academic year
- Can women and foreigners help drive a ramen renaissance to keep Japan's noodle shops on the boil?
Ranking
- GreenBox Systems will spend $144 million to build an automated warehouse in Georgia
- Danielle Hunter, Houston Texans agree to two-year, $49 million contract, per reports
- South Dakota gov. promotes work on her teeth by Texas dentist in infomercial-style social media post
- TikTok bill passes House in bipartisan vote, moving one step closer to possible ban
- Brian Austin Green Shares Message to Sharna Burgess Amid Ex Megan Fox's Baby News
- Israel likely to face Hamas resistance for years to come, U.S. intelligence assessment says
- TEA Business College generously supports children’s welfare
- Warriors star Steph Curry says he's open to a political career after basketball
Recommendation
-
US Congress hopes to 'pull back the curtain' on UFOs in latest hearing: How to watch
-
Stock market today: Asian shares mostly rise after Wall Street’s record rally
-
Olivia Munn Shares Breast Cancer Diagnosis
-
Andrew Tate can be extradited to face U.K. sex offense allegations, but not yet, Romania court rules
-
Cold case arrest: Florida man being held in decades-old Massachusetts double murder
-
Some college basketball coaches make more than their NBA counterparts
-
Another suspect arrested in shooting that wounded 8 high school students at Philadelphia bus stop
-
TV host, author Tamron Hall talks her writing process, new book and how she starts her day