essays pieces of the puzzle
Friday, January 4th, 2013
curve cuts

13 0104 yield curve cuts

Everyone talks about the yield curve but no one does anything about it.  Well, I guess the Fed does have one end anchored.

The next time someone says the curve is steep, you can look at this handy chart to see how it looks versus the last few decades.  The spread of the full curve is shown at top, then it is broken down into four parts in the lower panels.  Each of those has the same scale, so you can get a sense of where the contribution to the curve comes from and where each part is relative to history.

Of course, interest rates have plummeted over this period, so a sense of what’s “normal” from decade to decade is hard to assess.  But you can see that the steepness that exists is in the back part of the curve.

There are natural players in each of these areas, trying to figure out how to invest when there’s one very unnatural player extant, the aforementioned Fed.

When the relative stability you see above finally changes, there could be further steepening if the Fed is thought to be behind the inflation curve or a flattening that surprises those that expect all rates to rise when Fed funds does.

I’m looking forward to finding out which it is.  (Chart:  Bloomberg terminal.)

On the new “pieces” site, the most recent posting is about research on hedge funds.