Yield rate

per year

8%

’94

6%

1998

4%

2002

2%

2006

30-year

10-year

2010

5-year

2-year

6-month

2014

1-month

Treasury

8% yield

per year

6%

4%

2%

1992

1994

1996

1998

2000

30-year

2002

20-year

2004

10-year

7-year

2006

5-year

2008

3-year

2-year

2010

1-year

2012

6-month

3-month

2014

1-month Treasury

8% yield

per year

6%

4%

2%

1992

1994

1996

1998

2000

30-year

2002

20-year

2004

10-year

7-year

2006

5-year

2008

3-year

2-year

2010

1-year

2012

6-month

3-month

2014

1-month Treasury

8%

yield

per

year

6%

4%

2%

’92

’94

’96

’98

’00

30-year

’02

’04

10-year

’06

5-year

’08

2-year

’10

’12

6-month

2014

1-month Treasury

Yield curve 101

The yield curve shows how much it costs the federal government to borrow money for a given amount of time, revealing the relationship between long- and short-term interest rates.

It is, inherently, a forecast for what the economy holds in the future — how much inflation there will be, for example, and how healthy growth will be over the years ahead — all embodied in the price of money today, tomorrow and many years from now.

6%

4%

Wednesday

2%

Short-term rates

1-year

3-year

7-year

10-year

6%

4%

Wednesday

2%

Short-term rates basically follow the interest rates set by the Federal Reserve.

 

3-month

1-year

2-year

3-year

5-year

7-year

10-year

20-year

30-year

6%

4%

Wednesday

2%

Short-term rates basically follow the interest rates set by the Federal Reserve.

 

3-month

1-year

2-year

3-year

5-year

7-year

10-year

20-year

30-year

6%

4%

Wednesday

2%

Short-term rates basically follow the interest rates set by the Federal Reserve.

 

3-month

1-year

2-year

3-year

5-year

7-year

10-year

20-year

30-year

Where we stand

On Wednesday, both short-term and long-term rates were lower than they have been for most of history – a reflection of the continuing hangover from the financial crisis.

The yield curve is fairly flat, which is a sign that investors expect mediocre growth in the years ahead.

Congress threatens to let the country default

’07

’09

3-year

’11

1-year

’13

3-month

’15

’05

2007

2008

5-year

2009

3-year

2010

2-year

2011

Congress threatens to let the country default

1-year

2012

6-month

2013

3-month

2014

1-month

2015

’05

2007

5-year

2009

3-year

Congress threatens to let the country default

2-year

2011

1-year

6-month

2013

3-month

1-month

2015

’05

2007

5-year

2009

3-year

Congress threatens to let the country default

2-year

2011

1-year

6-month

2013

3-month

1-month

2015

Deep in the valley

In response to the last recession, the Federal Reserve has kept short-term rates very low — near zero — since 2008. (Lower interest rates stimulate the economy, by making it cheaper for people to borrow money, but also spark inflation.)

Now, the Fed is getting ready to raise rates again, possibly as early as June.

Long-term

rates

8%

6%

4%

’14

’12

’10

’08

’06

’04

’02

8%

Long-term

rates

6%

4%

’14

’12

’10

’08

2006

2004

’02

8%

Long-term

rates

6%

4%

’14

’12

’10

’08

2006

2004

’02

8%

Long-term

rates

6%

4%

’14

’12

’10

’08

’06

’04

’02

Last time, a puzzle

The last time the Fed started raising rates was in 2004. From 2004 to 2006, short-term rates rose steadily.

But long-term rates didn't rise very much.

The Federal Reserve chairman called this phenomenon a “conundrum," and it raised questions about the ability of the Fed to guide the economy.

Part of the reason long-term rates failed to rise was because of strong foreign demand.

6%

10-year

Treasury

yield

4%

2%

’98

’02

’06

’10

’14

6%

4%

10-year

Treasury

yield

2%

1.43%

’98

’02

’06

’10

’14

6%

10-year

Treasury

yield

4%

2%

1.43%

’98

’02

’06

’10

’14

6%

10-year

Treasury

yield

4%

2%

1.43%

’98

’02

’06

’10

’14

Long-term rates are low now, too

Foreign buyers have helped keep long-term rates low recently, too — as have new rules encouraging banks to hold government debt and expectations that economic growth could be weak for a long time.

The 10-year Treasury yield was as low as it has ever been in July 2012 and has risen only modestly since.

Some economists refer to the economic pessimism as “the new normal.”

30-year

Recent

long-term

rates

10-year

5-year

2-year

6-month

4-week bills introduced

1-month

’94

’98

’02

’06

’10

’14

30-year

20-year

Recent long-term rates

10-year

7-year

5-year

3-year

2-year

1-year

6-month

3-month

4-week bills were introduced in 2001

1-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

30-year

20-year

Recent long-term rates

10-year

7-year

5-year

3-year

2-year

1-year

6-month

3-month

4-week bills were introduced in 2001

1-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

30-year

20-year

Recent long-term rates

10-year

7-year

5-year

3-year

2-year

1-year

6-month

3-month

4-week bills were introduced in 2001

1-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

Long-term rates are low now, too

Here is the same chart viewed from above.

30-year

10-year

5-year

2-year

Negative

’94

’98

’02

’06

’10

’14

30-year

20-year

10-year

7-year

5-year

3-year

2-year

Negative

1-year

6-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

30-year

20-year

10-year

7-year

5-year

3-year

2-year

Negative

1-year

6-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

30-year

20-year

10-year

7-year

5-year

3-year

2-year

1-year

Negative

6-month

’92

’94

’96

’98

’00

’02

’04

’06

’08

’10

’12

’14

Yields in Germany are negative

As low as rates are in the United States, they are even lower in countries like Germany, where bond-buying by the European Central Bank has turned yields negative.

Investors who buy a German 7-year bond now, and hold onto it until 2022, are essentially agreeing to lose money. They will be paid back less money than they lent the government.

’94

’98

’02

10-year

’06

5-year

2-year

’10

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

Yields in Germany are negative

Some investors are betting that rates will be even lower in the future or that future exchange rates will make them profitable. Some may be required to hold bonds by law. Others are just willing to accept whatever it takes to invest in something safe. Still others are expecting deflation, which can make real interest rates positive.

Last month, 10-year yields in Germany were even lower than those in Japan.

’94

’98

’02

10-year

’06

5-year

2-year

’10

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

’94

’96

’98

’00

’02

’04

10-year

’06

5-year

’08

’10

2-year

’12

6-month

’14

A different shape in Japan

Yields in Japan have been low for decades, as the country struggled with deflation.

With rates so low in Europe and Japan, the rates in the United States are actually among the highest in the highly industrialized world.

The bond market expects slow growth and very low inflation for years to come.