Treasury Yield Curve: Definition & Historical Data

Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

This lesson will introduce you to the Treasury Yield Curve. We will first cover what U. S. Treasury Securities are, then the importance of the yield curve which reflects the rates on various terms of Treasury Securities.

U. S. Government Securities

In some ways, the United States Government functions like a business. In order to carry out its day to day activities and to finance long-term projects, it needs to borrow money. Corporations that need to borrow can go to the bank or for long-term needs issue bonds. It's not so simple for the U. S. Government, though. The U. S. Government doesn't go to the bank, it borrows the money from investors around the world by issuing U. S. Government Securities.

The simplest form of government security is the good old U. S. Savings Bond. Series EE Savings Bonds can be purchased for as little as $25 making them a popular tool for teaching young people the value of thrift. The interest they pay is very low but they are a very safe investment.

Savings Bonds are just the tip of the iceberg when it comes to U. S. Government Securities. They also issue large denomination securities used by individual investors and corporations alike to park cash. Treasury Bills have a maturity of less than one year, Treasury Notes have a maturity from one to ten years, and Treasury Bonds go from ten to thirty years.

U. S. Government Securities are considered by the financial community to be the safest investment in the world since the United States is the world's largest economy and the U. S. Government has never defaulted on its debts. That allows the government to pay a very low rate of interest since there is little risk investors won't get their money back.

The Treasury Yield Curve

The Treasury Yield Curve is a line chart that plots the interest rate or yield on treasury securities on the vertical axis and the maturity of the security on the horizontal axis. This is what it looks like:

Normal Yield Curve
Normal Yield Curve

The normal shaped yield curve slopes upward as a reflection of risk. There is almost no risk that an investor won't get his or her money back in the short term, so the rates are quite low for the early years. But as we move to the right on the chart into longer terms, rates rise since the risk that we might have a nuclear war or some other calamity increase, thus increasing the risk.

Let's follow Alan, a financial analyst for a national retailer as he does a report for top management about happenings in the macro-economy of the United States. One of the things he studies each month is the Treasury Yield Curve because it shows some important things. Other interest rates are tied to Treasury yields. For example, mortgage rates go up and down based on the rate for the ten-year Treasury Note. The rates on bonds issued by Alan's company will also be pegged by the market to Treasury rates.

The shape of the curve is also important because it reflects investors' expectations about economic performance. A normal shaped yield curve reflects the expectation of a healthy and growing economy. But, as the slope of the curve gets steeper it is adding in expectations for inflation or rising prices. Alan is going to alert management to this condition for the first five years from the normal yield curve we have already shown.

The Inverted Yield Curve

One thing to looks for is an inverted yield curve. It looks like this:

The inverted yield curve slopes downward
Inverted Yield Curve

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