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Fixed Income

1-Month Treasury Yield

Similar to the 10-year Treasury yield, the 1-month Treasury yield reflects the return on investment on U.S. government debt maturing in 1 month. 

The 1-month Treasury yield had been close to zero since the financial crisis in 2007. After moderate increases in 2016-2018, it noted at 1.48% at the end of 2019. Most recently (March 2020), the yield has come back close to zero.

(Source: Board of Governors of the Federal Reserve System (US))

 

10-Year Treasury Yield

The 10-year Treasury yield reflects the return on investment on debt issued by the U.S. government and which matures in 10 years. It is the effective interest rate that the U.S. government pays.

The yield also reflects how investors feel about the economy. The higher the yields for long-term debt (10, 20, 30 years), the better the economic outlook. 

Since the 1980s, the yield has been declining, noting 1.92% at the end of 2019.

(Source: Board of Governors of the Federal Reserve System (US))

 

US Treasury Yield Curve

The US Treasury yield curve plots the yields (interest rates) of US government debt with different maturity dates. 

Usually, longer-term Treasury securities usually have a higher yield than shorter-term Treasury securities (upward sloping curve). When the opposite occurs, the situation is characterized as an inverted yield curve which is considered to be a predictor of economic downturns. 

(Source: author calculations)

 

Federal Funds Rate

The federal funds rate represents the interest rate at which banks lend reserve balances to other banks overnight. Any money that banks have in excess of required reserves (set as a percentage of their deposits in account) is available for lending to other banks. 

The federal funds rate peaked at 22% at the end of 1980 and has declined since then. In particular, in the aftermath of the financial crisis in 2007, the federal funds rate noted at record lows as an effort to support economic growth. At the end of 2019, the rate was 1.55%.

(Source: Board of Governors of the Federal Reserve System (US))

 

BBB Investment Grade Spread

The figure represents the Option-Adjusted Spread (OAS) of the US Corporate BBB Index which tracks the performance of investment grade rated corporate debt publicly issued in the US. In general, a credit spread is the yield difference between U.S. government debt and another debt security (same maturity but different credit quality). 

The BBB investment grade spread peaked in at 7.84% in December 2008 and noted at 1.30% in December 2019. Amidst recession fears caused by the coronavirus, the spread jumped to 4.25% in March 2020. 

(Source: Ice Data Indices, LLC)

 

High Yield Spread

The figure represents the Option-Adjusted Spread (OAS) of the US High Yield Master II Index which tracks the performance of below investment grade rated corporate debt publicly issued in the US. 

The high yield spread peaked in at 19.88% in November 2008 and noted at 3.60% in December 2019. Amidst recession fears caused by the coronavirus, the spread jumped to 9.82% in March 2020. 

(Source: Ice Data Indices, LLC)

 

TED Spread

The TED spread is the difference between the 3-month Treasury yield and the 3-month LIBOR (London Interbank Offered Rate). TED stands for Treasury-EuroDollar rate.

The TED peaked at 3.15% in September 2008 and noted at 0.37% at the end of 2019. 

(Source: Federal Reserve Bank of St. Louis)

 

3-Month Commercial Paper Minus Federal Funds Rate

Commercial paper refers to an unsecured, short-term debt instrument issued by corporations, typically used for the financing short-term liabilities (e.g., payroll, accounts payable). Only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount for the debt issue.

(Source: Federal Reserve Bank of St. Louis)

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