Basic questions about T-Notes and Yield Curves

Discussion in 'Financial Futures' started by murrica, Apr 14, 2013.

  1. murrica


    Can someone explain, in layman's terms, what is the relationship between T-Bonds and yield curves? (Please see 1st and 2nd images below). I admit to having limited knowledge of this area of finance, but am interested to learn more. I can read through wikipedia articles for academic answers, but was hoping for some concrete/real world examples that might help me to understand these, and to perhaps instigate meaningful discussion pertinent to the current U.S./int'l economic conditions. This inquiry came up because I noticed the 2 Year T-Notes are particularly flat relative to the yield curve chart (see second question below).

    Secondly, can someone explain the significance (*not* in terms of technical analysis, chart patterns, etc.) of the very tight consolidation on the 2-year T-Bond chart (see first image)? Simple explanations are greatly appreciated. I am not sure, but this might be best answered in conjunction with my first question.



    I apologize for the simplistic questions. All helpful input is appreciated.

  2. kkfx


    Watch this video about T-bond futures contract and its specifications and how the tick value is determined, also the yield curve and price relationship.

    Check out CME website for .pdf files about treasury bonds futures contract specifications.
  3. Firstly, there is an inverse correlation between bond prices and yields. Generally speaking higher the yield, lower is the bond /Tsy price.

    However the way you posted the images with a 20 yrs spanning time for the US 2Y Note and its yield of the latest months , will not reveal this relationship so clearly. So try to plot the same time frames.

    The lateral phase of the 2Y Note price means that given the economic framework in terms of fundamental and monetary factors (i.e. growth, inflation, Fed policy, etc), the players have no interest to buy/or sell the notes in a range larger that 1 figure, ex. from 110.00 to 111.00 ...and back, probably because of the Fed policy of extremely low yields that offers limited space for opportunities.
    All this is clearly in relative, comparative terms vs what other economies and CBs are doing with their short segment of they curve. for example, if Fed decides to increase rates while ECB no (or vice-versa), caeteris paribus, you could see a shift in those prices/yields.
    However if you plot the size of the yield moves over the years side -to-side with 2Y Note price, the factors developing over time such as Fed, inflation, growth... impacted heavily the swings of the price (first screenshot you posted) and the yield.
  4. ??? You are the government and need to borrow money. I loan you money at 6% because that is the going rate and you are a good risk because you have never defaulted. In return I get a 6% bond.

    Now rates go down to 4%. That makes my 6% bond just that much more attractive, and people want to buy it from me.

    Do I want to hang on to it and make 6% for 20 years? Or do I want to sell it at what they are offering and make 8% in just two years?

    time is money
  5. murrica


    Thanks, everyone, for your detailed and thoughtful answers.

    I have aligned and inverted the 2-yr yield curve to match the bond futures:


    This clearly shows us that the 2 year bond volatility is all but non-existent at this time, even though the yield curve still seems to have quite a bit of movement.
  6. murrica


    I'm watching this video now, first. Wow, this is a very nice introduction to how the futures are priced.
  7. +1 ... I also like the ones from Yale, but this ones from UC Davis are really good...
  8. (ZIRP) Zero Interest Rate Policy from the Fed. :cool:
  9. murrica


    :) I still need to read through all of the provided material from the other posters to learn exactly why the 2Yr Note is basically flat relative to the yield curve (see aligned chart above). This is mostly what sparked my curiosity.

    Presumably there are quantitative factors that I do not yet understand that go into the futures contract pricing, not simply Fed policy (but I do not know, just guessing).
    #10     Apr 14, 2013