Across the US - and beyond - people are holding their breath in the apprehension of an economic slump or full-on recession. Even if you aren't familiar with the usual financial indicators (which have been presenting some precarious signals), chances are that you've heard the news about banks going under, companies reducing staff, and interest rates constantly on the rise.
One indicator that seems a bit off right now is the yield curve for US treasuries. Below, you'll see a line chart representing data pulled from the US Department of Treasury, imported into Google Sheets and visualized with Superchart. First, let's get into an explanation of the data and potential meaning behind an 'inverted yield curve'.
The US Treasury par yield curve is a graphical representation of the yields of all US Treasury debt instruments. It shows the market's expectation of future interest rates and serves as a benchmark for other debt securities. The par yield curve is constructed by plotting the yields of treasury bonds, notes, and bills at their different maturities from shortest to longest.
We pulled this data from the US Department of Treasury Website where they list various economic data sets, allowing you to download them to CSV or consume them in alternate forms. Visitors to the site will find the latest daily yields of US Treasury securities broken down by maturity date and type of debt instrument. The yield for each maturity date is interpolated from the yields of the closest two debt instruments with different maturities.
The US Treasury par yield curve can be used to estimate interest rates on a variety of other investments, such as corporate bonds or mortgages. It also serves as an important tool for economists who analyze economic trends and policymakers who make decisions about monetary policy. It is important to keep in mind that while the par yield curve can provide guidance, it does not predict future changes in interest rates. Ultimately, the market will determine what yields materialize.
An inverted yield curve for US Treasuries occurs when longer-term bonds have a lower yield than shorter-term bonds. This is contrary to the normal relationship between Treasury yields and maturity, whereby yields generally increase as the duration of an investment increases. An inverted yield curve can indicate that investors are expecting lower interest rates in the future, or that a recession is coming. A prolonged inverted yield curve may even signal a looming economic downturn. While an inverted yield curve doesn’t always mean bad news, it can be a warning sign of difficult times ahead and should be monitored closely by investors.
I'm no economist. I'm not sure you should trust me for investment advice. Nevertheless, I can say with confidence (especially after visualizing the data) that we are indeed inverted:
When you visualize it, it's much easier to see. The yield on 1 mo securities have outpaced the yield on 20 yr securities since mid-November 2022. Here you can see the clear inversion as well.
Here is a separate visual, where the darker the line the longer the period. Sometimes using a monochromatic sequence makes it even easier and more dramatic to see:
It's important to keep in mind that the US Treasury par yield curve provides guidance, not a prediction.
Investors should take time to understand the US Treasury par yield curve and how it can be used to inform their investment decisions. A thorough understanding of the par yield curve may help investors make better decisions and avoid costly mistakes. With a little bit of research, one can gain new insights into how the US Treasury market works and how it might affect investments in other asset classes. Happy yield hunting!
