Hello. I’m Daniel Greulich, Chief Investment Officer at GreenUp Wealth Management.
As the Federal Reserve debates whether to raise short term interest rates, I would like to take some time to talk about all treasury yields or the yield curve. In simple terms, the yield curve is a graph that shows the yields of different bonds at different maturities. In this case we’ll specifically be looking at US Treasuries. Typically, this curve slopes upwards, meaning that longer-term bonds offer higher yields than shorter-term bonds.
As an investor we expect to be paid more interest the longer that our money is locked up. So why is the yield curve important in terms of economics? Well, it’s often used as an indicator for the health of the economy. The yield at each maturity symbolizes the expected inflation and economic growth for that time period. As an example, a 10-year Treasury yields roughly 3 ½ % in the U.S. Using the yield curve, we would expect economic growth and inflation to average 3 ½ % over the next 10 years.
When the yield curve is steep, with a significant difference between short-term and long-term yields, it does suggest that investors are confident about the future of the economy and expected growth. On the other hand, when the yield curve is flat or inverted, with no or little difference between short-term and long-term yields, that would suggest that investors are uncertain about the future of the economy and may expect weaker growth in the future.
As the media focuses on the short-term Federal Funds Rate, at GreenUp we pay attention to both short-term and long-term Treasury Bonds on the yield curve and that helps us better understand how the Federal Reserve’s decision affects the economy today, and in the future.