|

Interest rates and yield curve

Hey guys, if the Fed keeps saying they are raising rates. Why does the yield curve keep sliding downwards?

(Source: https://economictimes.indiatimes.com/markets/stocks/news/with-yellen-on-...)

Automate your Excel models with the industry's most accurate financial, market and economic data.

It is a way to keep the market expectant to a good economic activity. Remember that not all operators review the graphs and the discourse of the FED should keep investors calm about the US economy

I am studying binary fx because I wish to be trader professional

Hrrrr… The graph shows the spread between 10y and 2y Treasury yields. Let’s assume that Treasury rates are perfectly correlated with Fed Funds rates (they are not). There are several reasons why the SPREAD between 2y and 10y rates could decrease.

First, longer term rates could have been an accurate expectation of future interest rates, in which case, the curve would flatten as the Federal Reserve raises the Fed Funds rate according to expectations.

Second, this might show an expectation of high growth (and inflation) in the short term relative to the long term. This is consistent with the effects of upcoming US policy with regards to taxes, which will boost short term growth but create larger deficits in the future. 

Third, there could be an imbalance of market supply and demand between short and long term bonds, from FOMC options, or any other reason. If there is a lot of demand for long term bonds over short term bonds, long term rates will decrease relative to short term rates. 

It’s important to realize that Fed Funds rates affect mostly short term rates, and there are a lot of reasons why long term rates might be segmented from short term rates. 

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

The Fed controls short term rates that banks borrow at. Over the past few years, popular commentary was that the Fed was why rates are so low. That never made any sense and has disappeared as people realize different points on the curve are influenced by different factors. The 10 2 spread does not measure the rate the fed controls and rather various market rates. 

Hi everyone, many thanks for the clarification!

just fyi. inverted yield curve, usual sign of recession.
fed controls short term rates. if economy heating up, they raise short term rates. (causing inverted or flattening yield curve)

http://businessinsider.com/how-does-federal-reserve-raise-interest-r...

long term rates depends on market/govt spending. aka cannot be controlled

https://fixingtheeconomists.wordpress.com/2014/08/15/does-the-central-ba...

so this is why when economy heats up, odds of recession rises. fed induced by tightening.

which is why people say “dont fight the fed” 

I love my cheese. I got to have my cheddar.