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Intro to the yield curve

  1. 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!!
  2. No, it's because there's a lot of demand from pension funds and various structured notes out there...
  3. martinghoul, in regards to the flatness between the 10 year and the 30 year?

    Whats the main motivation there? yields are attractive for them?
  4. 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. :cool:
  5. 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)
  6. 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. :cool:
  7. 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
  8. thanks guys, very insightful
  9. 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".
  10. Martinghoul so you're saying buying the 10yr ----> 30yr ---> = risk aversion?
  11. I know, I know, your "stuff" is so much more dignified and erudite than mine. :p
  12. Hahaha, nazz, I wasn't trying to be an arrogant prick, honest... It's just that, having been the wrong way on this trade in 2008, I have had time to do a lot of soul-searching. As a result, I feel very strongly about it, as the wound is still so very fresh.
  13. Well, it's a form of risk aversion, I guess. Point is that a pension manager's mandate requires them to hedge the interest rate exposure of some, if not a majority, of their liabilities. Hence, the ALM bid for long-dated duration, whether in cash bonds or derivatives, such as swaps/swaptions.

    In general, as I said, this is much more evident in EUR and GBP than USD, where some of the flatness is due to all sorts of structured notes malarkey happening (PRDCs and their ilk). The dynamics in JPY are very similar, but the effect is very different, 'cause the whole curve is weird.
  14. Let me pour some Johnnie Walker Black Label onto it instead of J.W. Gold Label. :)
  15. You're sweetness itself, truly...
  16. Another point to consider - bond managers usually hedge their corporate bond and mortgage purchases by selling treasuries at the matched duration point. They don't actually have to short sell (most of the time), but either through selling the naturally existing inventory of treasuries they are holding or through futures. A lot of corporate bonds are issued at the 10y point (rather than the 30s) and bond managers have been buying A LOT of corporate bonds in the last quarter or two, so the net effect is the 10y being sold into the market to make room for those corps, driving yields higher.

  17. And another point to consider that is particularly relevant to the US mkt is the convexity needs of the mtge community (they used to use participate mainly in the 10y area). Obviously, things have been changing a lot in that space, so it's not entirely clear how that dynamic will evolve.
  18. Is this because we are missing Countrywide and WAMU in the market place ? :D
  19. I don't know about "we". I ain't exactly missing them...

    It's just because the Fed owns all the mtges and doesn't give a rat's ass about hedging convexity.
  20. The yield difference between 2- and 10-year notes, also known as the yield curve, narrowed 0.02 percentage point to 2.79 percentage points this week. The spread reached a record 2.94 points on Feb. 18....I am sort of short the spread...
  21. I am sort of the same way :)...
  22. the idea being it cant really go too much further (oh those famous last words....) it could stay where it is for a long time though, no?
  23. Nah... I just think the Western world is going to resemble Japan.
  24. 04-21-10 06:30 PM

    Quote from Martinghoul:

    I don't know about "we". I ain't exactly missing them...

    It's just because the Fed owns all the mtges and doesn't give a rat's ass about hedging convexity.

    Hum, just thinking about taking some profits on this "risk free" trade. :)
  25. Very nice... Not sure we're done flattening, to be honest, but it might be worthwhile to take some money off the table.
  26. Can't remember the last time someone told me he was the <i>other</i> way. It's the mother of all consensus trades.
  27. I am not sure about that. Judging by all the recent pain and stops, I would have thought the mkt is the other way, if anything. At any rate, with the spread now at 237bps, it's moved a fair bit. Still a fair ways to go before we get into proper Japanese territory (sub 100bps).
  28. Can I get some views/comments on ZN -- is this thing going to the moon?