Guys, still very much coming to terms with the basics of how the current yield curve is and why it is where it is. As I think I understand it. the front end is held down by low interest rates and the yields further out are high due to the Treasury selling off longer term maturities to finance the massive debt. these yields are high to entice buyers. Im not quite sure why the 10yr-30yr section is so flat though. Is this normal? Is it due to the fed buying up as much debt as it does and artificially keeping the 30yr yield lower than it really should be? any comments links to relevant info or other wise would be much appreciated. Thanks in advance!!
No, it's because there's a lot of demand from pension funds and various structured notes out there...
martinghoul, in regards to the flatness between the 10 year and the 30 year? Whats the main motivation there? yields are attractive for them?
1) There's "excessive speculation" that supports the overall market. 2) Participants can be "reaching for yield", a form of speculation, in the longer end of the curve which produces the additional flattening with respect to the 10-year portion of the curve.
Thanks nazzdack. I know the yield curve is historically steep, but in specifically in regards to the 10-30 year section, how does this compare historically? does it just look flatter or is it actually flatter compared to historical averages? (just lookin for general information here)
1) The front-end of the yield curve has been manipulated as low as it can go. The overall steepness is "large", even compared to 1993 and 2004. 2) If you really feel motivated, you can gather cash market data to calculate extremes in steepness and inversion of the 10-year and 30-year region.
To give you a quick overview see the attached picture. I have included the current curve, as well as the 3 previous years and 2005. Hope this helps
The attractiveness of yields doesn't really have much to do with it. They are constrained by their mandates and have to hedge. Their hedging needs are greater than the supply of duration that the mkt can offer. Thus the curve flattens and 10s30s looks a lot flatter than, say, 5s10s. This dynamic is partially offset by the sovereign credit developments, which, for higher-quality sovs, tend to steepen the curve. There's also convexity effects, but we don't need to get into that. In general, this pattern can be seen in pretty much all developed economies (apart from Japan, for obvious reasons). The US is not the flattest by any means. For example, 10s30s in UK is inverted for most of the time, due to the particularly acute supply/demand imbalance. And, for the record, this has nothing whatsoever to do with speculation and very little to do with "hunt for yield".