Post AXXD3XfldnE85CtVL6 by NBS@noagendasocial.com
(DIR) More posts by NBS@noagendasocial.com
(DIR) Post #AXXCAaIECH1AHag68e by NBS@noagendasocial.com
2023-07-10T00:23:57Z
1 likes, 4 repeats
Discussion on the yield curve. Disclaimer: I’m no credit market expert. I’m an equity index derivatives trader who uses Treasury markets for signals and information, so this is by no means thorough.Few points to keep in mind:1) Yields move inversely to price2) Federal Reserve (not the Fed Gov't) set the overnight interbank lending rate3) Treasury rates are viewed as the risk-free rate, aka a baseline for taking risk4) Interest rates represent the demand/supply of a currencyContinued
(DIR) Post #AXXCJIjspbzwRjloDQ by NBS@noagendasocial.com
2023-07-10T00:25:31Z
0 likes, 0 repeats
The purpose of this post is to describe how I read/watch the Treasury yield curve for trading/investing signals and information.When the Fed lowers/raises rates, they do this (now) by adjusting the overnight rate at which prime banks lend/borrow with one another. There’s tons of technical info about this (more here: https://twitter.com/concodanomics/status/1572379548653850625), but for our purposes just know that they set the < 30 day rates.This is referred to as the "target rate."Continued…
(DIR) Post #AXXCNMMXIl3YqImioK by NBS@noagendasocial.com
2023-07-10T00:26:15Z
1 likes, 0 repeats
The yield curve itself starts with the 3 month Treasury bill rate and goes out to 30 years (even further with SOFR). These rates literally represent the amount of interest you will be paid if you buy a Treasury and hold it to maturity. However, the curve, individual yields, and spreads between durations represent the market’s opinion on various economic data/growth and sentiment.This is the crux of my post: how to use the yield curve, it's components, and the yield spreads for signals and info
(DIR) Post #AXXCPVlzHhRQbkiQRk by NBS@noagendasocial.com
2023-07-10T00:26:38Z
1 likes, 0 repeats
The 2yr bill and shorter durations are dictated by the Fed. Not literally, but since the Fed sets the front end rates (< 30 day), the 2yr bill reflects the Fed’s hiking/lowering plans for the next few years. This yield will react most on days with FOMC meetings or economic data, and therefore provides insight on how surprising said data was to the market.Continued...
(DIR) Post #AXXCUeskqPOmJ7Kpma by NBS@noagendasocial.com
2023-07-10T00:27:34Z
1 likes, 0 repeats
For example: if the FOMC raises 25bps (already priced in before the meeting), and the 2yr during the press conference shoots up another 15bps, the market is reacting in excess of what was priced into the event. In such a case, the market intrepreted the contents press conference as more inflationary or the Fed itself as more hawkish (aggressive to raise rates). Why is a diferent story.So the 2yr is useful for gauging the market’s immediate reaction to both Fed speak/meetings and economic data.
(DIR) Post #AXXCb8yfrYzlNtCEoy by NBS@noagendasocial.com
2023-07-10T00:28:44Z
0 likes, 0 repeats
The next important maturity is the 5yrWhile not nearly as important, the 5yr is referenced by folks keeping an eye on inflation. The market’s expectation for inflation over the next 5yrs is called the 5-Year Breakeven Inflation Rate (see here: https://fred.stlouisfed.org/series/T5YIE), which is calculated by taking the 5yr Treasury rate minus the 5yr TIPS rate (Treasury Inflation Protected Security). This rate gives you the market’s expected inflation rate on average over the next 5 years.Continued...
(DIR) Post #AXXCdBimdIkGTNjqBU by NBS@noagendasocial.com
2023-07-10T00:29:07Z
1 likes, 0 repeats
Perhaps the most important: the 10yr. Old bond trader friend once told me that the 10yr is all you need to watch, and I’m a fairly big believer in that as well.The 10yr is a bellwether for the market’s opinion/sentiment on the US economy and for good reason. Mortgage rates use the 10yr as a reference rate, equity markets use it to discount cash flows and price assets, commercial borrowers often get loans based on this rate, and generally it is thought of as the investor’s confidence in the US.
(DIR) Post #AXXCeN2q1BA7sigO4u by NBS@noagendasocial.com
2023-07-10T00:29:20Z
0 likes, 0 repeats
Finally, the 30yr. Less of a signal and of less importance than the 10yr, the 30yr represents the market’s opinion on the economic outlook of the US. It’s an important yield to monitor over time as economic data is released or when fiscal policy decisions are made in Washington. While it’s been impacted by the near 30 year bull market in Treasuries, it’s been fairly stable between 2.5% - 5.5% (barring 2020 – 2021 when shit got crazy) for the past 15 years.Continued...
(DIR) Post #AXXClVf4NcNAdHyA2C by AlabamaHokie@noagendasocial.com
2023-07-10T00:30:37Z
0 likes, 0 repeats
@NBS dude, this could be on your substack
(DIR) Post #AXXCoDPGhvYWsvrujI by NBS@noagendasocial.com
2023-07-10T00:31:06Z
0 likes, 0 repeats
The 2nd most important topic: yield spreadsA yield spread refers to the difference between two yields in the curve. Most important is the 10yr-2yr yield spread. Historically this is watched as a way to predict a recession. This makes sense given what we’ve discussed: the Fed dictates the 2yr the market dictates the 10yr. More detail on this in the next reply.Generally though, the yield curve should be upward sloping as investors require additional compensation for locking up $ for longer.
(DIR) Post #AXXCs2ZOwJTyQzQqvY by NBS@noagendasocial.com
2023-07-10T00:31:48Z
0 likes, 0 repeats
More on 10s/2s spread.The 2yr yield is high now because the Fed has aggressively raised rates to cool inflation. In doing so, the Fed has reduced the supply of $ in the economy, and therefore dampened consumer spending (or attempted to do so). Near the end of 2021, the 2yr yield was 0.20% (near the Fed’s target rate, mind you), while the 10yr was 1.25%. Fast forward to now, the 2yr is 4.95% and 10yr 4.05%.This is the inversion, which as you can see has been primarily driven by the front end.
(DIR) Post #AXXD3XfldnE85CtVL6 by NBS@noagendasocial.com
2023-07-10T00:33:53Z
0 likes, 1 repeats
Long winded, but it's a difficult topic on which to be concise.It's difficult to suggest textbooks or material to read to learn more about this topic, as academia is often not useful in trading and nowadays textbooks aren't even correct with how Fed policy works given our current environment.My #1 recommendation would be anything and everything in this thread, which is a collection of other Twitter threads, which discusses nearly everyhting you need:https://twitter.com/concodanomics/status/1586405206459236355Have fun!
(DIR) Post #AXXD6QcQK7uX4fhrTk by NBS@noagendasocial.com
2023-07-10T00:34:24Z
0 likes, 0 repeats
@skells Here you go sir
(DIR) Post #AXXEOvYQ93H2BZDdfE by D-Droid@poa.st
2023-07-10T00:48:57.246951Z
0 likes, 0 repeats
@NBS Don't understand any of this but I'm bookmarking it to try and learn it and make money off it
(DIR) Post #AXXFuswFVORnIIAQ1A by BlueDouche@noagendasocial.com
2023-07-10T01:05:56Z
0 likes, 0 repeats
@NBS This stuff is a lot more clear if someone has a University Economics (classical) and Finance Background.
(DIR) Post #AXXOcD8T5WUo1H3KQC by blakemichigan@noagendasocial.com
2023-07-10T02:43:23Z
0 likes, 0 repeats
Good read... Thanks @NBS
(DIR) Post #AXXe3YVnDbr7RpSYoi by Sandbox@noagendasocial.com
2023-07-10T05:36:25Z
0 likes, 0 repeats
@NBS Great Job! Could not have said it better myself! I would add a few things as a side salad. The maturities past 10 years reflect demand for long dated duration which may look rich compared to the 10 year. If you manage a life insurance portfolio and have a young (under 30) demographic you will need to match life expectancy to duration. Actuaries (statistician employed by insurance companies) figure out how much death benefits are you going to need in the future. So they need long duration.
(DIR) Post #AXXf5SpHQdawLb34Fs by Sandbox@noagendasocial.com
2023-07-10T05:47:58Z
0 likes, 0 repeats
@NBS That’s why there is demand. Also…thats why Blackrock went into buying and renting single family homes as an asset class. Their clients demanded long duration assets to match liabilities. They borrowed money at 30 year fixed residential rates or they would issue asset backed securities to arbitrage the yield curve (ABS was generally 5 years and shorter).Most commercial loans are shorter or floating which makes them have to refinance the loan at shorter intervals. The current yields are tough
(DIR) Post #AXXgAGrHS4IadFq9QW by Sandbox@noagendasocial.com
2023-07-10T06:00:02Z
0 likes, 0 repeats
@NBS I believe the real wild card now is insurance premiums….for everything. Between bond portfolios valuations dropping and claims rising it would not surprise me to see double or triple ALL insurance products prices. Wait till these vaxx injuries start impacting disability, health and death benefits. Risky real estate should have to trade as if you need to be self-insured….budget 10mm replacement cost for your 10mm home destroyed…maybe more because of inflation.
(DIR) Post #AXYaXD5dDwo92P4GLw by jhclouse@noagendasocial.com
2023-07-10T16:31:40Z
0 likes, 0 repeats
@NBS Just FYI, Twitter no longer allows us to see replies without an account. We can just see the first tweet.