What is the Yield Curve?
I’ve drawn a yield curve here with rates on this axis and time on this axis. The further out in time the higher rate you should get. That is what is called a normal interest rate. You should get paid more for locking your money up for thirty years than you do for locking it up for two years. That is the normal yield curve. There are two other types of yield curve. The inverted yield curve is where the short end pays you more than rates on the long end. So as you invest longer, rates are lower. This typically happens in a recession where investors do not expect economic growth to be high going out in time so they are not willing to lock their money up. Then you have a flat yield curve where the short and the long end are paying about the same. This is what is concerning investors right now. As the Fed has pushed up short term interest rates, we’ve seen the long term rates come down. We are getting closer to a flat yield curve. You aren’t being paid to lock your money up for a longer term. Right now for a three month Treasury, you get about one percent and for thirty years you get about 2.78%, so the yield curve isn’t paying you. However, there is high demand among investors. What would normal look like? Here is the ten year Treasury yield average over the past 100 plus years. It is 4.5% compared to the 2.16% roughly that you are getting on a 10 year Treasury paper right now. Looking at that, we have a ways to go to be on a normal pace. If the Fed continues to raise short term rates and the long term rates don’t go up, we will have a flat yield curve and possibly an inverted yield curve. We will continue to watch and keep you informed.
In the meantime, if you’d like to see how the yield curve has changed over time click here.
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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