Bond current yield - short term is higher than long term

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oem7110
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Bond current yield - short term is higher than long term

Post by oem7110 » Mon Mar 01, 2010 6:12 am

Does anyone have any suggestions on what happen for Bond current yield? when short term yield is higher than long term yield.
Thanks in advance for any suggestions
Eric

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Post by jas-105 » Mon Mar 01, 2010 8:41 am

Right now , short-term yields (2 year +) are actually higher than long-term yields (10 year +)......but when it's the other way around (inverted) it is generally assumed that a recession or slowing economy lays ahead.

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Post by oem7110 » Mon Mar 01, 2010 10:43 am

jas-105 wrote:Right now , short-term yields (2 year +) are actually higher than long-term yields (10 year +)......but when it's the other way around (inverted) it is generally assumed that a recession or slowing economy lays ahead.
short-term yields (2 year +) is 0.81%
long-term yields (10 year +) is 3.61%
Short-term is less than long-term, why do you show that short-term yields (2 year +) are actually higher than long-term yields (10 year +)......? Do their rates based on year for period?

Thank you very much for any suggestions

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Post by jas-105 » Mon Mar 01, 2010 11:54 am

Sorry, I had intended it to be short-term lower than long-term, thanks for correction.

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Post by oem7110 » Tue Mar 02, 2010 3:33 am

jas-105 wrote:but when it's the other way around (inverted) it is generally assumed that a recession or slowing economy lays ahead.
Thank you very much for suggestions
Do you mean that if short-term is higher than long-term? Recession or slowing economy lays ahead. During recession, interest rate usually go lower, do you have any suggestions whether Bond - current yield will go lower or higher? will interest rate affects the Bond - current yield?
Thank you very much for any suggestions
Eric

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Post by jas-105 » Tue Mar 02, 2010 4:16 am

Eric

Some people consider that there is no better prediction of future interest rates than the bond markets themselves as this is the net opinion of many thousands of traders, speculators, hedgers etc .

Short-term rates will have an affect on long-term to some degree of course , although the actual risk of the bond issuer (be it a country or company) also plays a part.

My own view is that we see lower long-term rates before they go (much) higher, although I'm going to rely on my trendfollowing model to decide for me rather than try and predict what happens (this is not necessarily the right way of course !).

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Post by oem7110 » Tue Mar 02, 2010 5:55 am

jas-105 wrote: no better prediction of future interest rates than the bond markets themselves as this is the net opinion of many thousands of traders, speculators, hedgers etc .
So the bond market will be leading indicator for future interest rates, as I interpret your statement properly. For Bond - current yield, if the short-term rate is higher than long-term rate, it implies recession. On the other hand, for currency US vs AUD, if short-term interest rate for AUD is higher than long-term rate for AUD, what does it imply?

Do you have any suggestions?
Thank you very much for any suggestions
Eric

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Post by nodoodahs » Tue Mar 02, 2010 4:45 pm

The typical state of affairs for any single currency’s rates is for the shorter term to be slightly lower than the longer term, e.g., the yield on U.S. three-month money is typically about 1.5% or so below the yield on U.S. ten-year money. The relationship in term rates is pretty much the same in every country that has a central bank.

IMO this is a result of near-constant central bank policy intervention creating a premium on time, i.e., if you want me to loan you, the central bank, money for a long time, I’m generally going to want more interest from it.

The central banks are in more control over the shorter-term rates than the longer-term rates. So if they’ve been in a long expansionary phase and have been tightening credit slowly over time, they’ll typically wind up pushing the short rate higher and higher, until the “curve is flattenedâ€

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Post by jas-105 » Wed Mar 03, 2010 5:51 am

Quantiitative Easing (QE) is another issue , in that the central banks themselves (particularly in the UK) are buying up bonds at the longer end of the curve which may be distorting it by keeping it flatter than it would otherwise be under more "natural" conditions. Time will tell if this is the case.

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Post by oem7110 » Sat Mar 06, 2010 7:38 pm

Full Recession - the yield curve is normal (about 2% difference). Am I right?
nodoodahs wrote: the shorter term (1.5%) to be slightly lower than the longer term (2.5%), e.g., the yield on U.S. three-month money is typically about 1.5% or so below the yield on U.S. ten-year money.
Late Recovery - In this stage, interest rates can be rising rapidly, with a flattening yield curve (0% difference).
nodoodahs wrote: The central banks are in more control over the shorter-term rates than the longer-term rates. So if they’ve been in a long expansionary phase and have been tightening credit slowly over time, they’ll typically wind up pushing the short rate higher and higher, until the “curve is flattenedâ€

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Post by nodoodahs » Sat Mar 06, 2010 11:02 pm

You can find “officialâ€

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Post by oem7110 » Sun Mar 07, 2010 2:54 am

Thank everyone very much for suggestions

Let all comparation using 10 year as a based point,

Before breaking something, short-term 3 month is almost equal or higher than 10 year, do you have any suggestions whether middle-term 2-5 year is closed to 10, but less than 3 month or not? If Fed rises short-term to control inflation, is the middle-term affected by the market? what is happening on the middle-term?

After breaking something, short-term is drop quickly below long-term, in this situation, how does the market behave on the middle-term market? and what is the implication for their activities?

Furthermore, if someone borrows a loan for 5 year, will the interest rate for 5-year loan affect middle-term 5 year yield curve at a based point for comparation?

If many people need to borrow money for short term, will short-term yield curve reflect on market activity and rise too? If many people need to apply a 5 year loan for buying a new car, will the same peiord yield curve reflect on the market activity too? so do you have any suggestion on what kinds of activities is it to affect the yield curve?

3-month ?
6-month ?
12-month ?
5-year ?
10-year ?
30-year for Home Mortgage?

Do you have any suggestions?
Thank everyone very much for any suggestions
Eric

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Post by nodoodahs » Sun Mar 07, 2010 9:26 am

A complete discussion of modeling the whole curve is beyond this thread. You need to search for some academic papers on this, use Google Scholar, Repec, SSRN, or search at the Fed websites.

Usually 5 year is between 3 month and 10 year, but much closer to 10 year yield. When the curve gets very flat, this can be different, but all the rates will be close to each other (that's why the curve is "flat"). When it's inverted, things get weird, find and read the research if you're that interested.

Time spread on Treasuries is only one element that affects consumer loans. Others might include corporate credit spreads, the perceived risk of the individual borrower, and other things. Again, this is beyond the scope of this thread in my opinion.

Best,

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Post by oem7110 » Thu Apr 15, 2010 12:36 pm

Thank everyone very much for suggestions
Eric

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