What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

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lack_ey
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What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by lack_ey »

Just as a short disclaimer, this post is in the theory section for a reason and is not about personal investments.

I haven't really been checking the news, Fed watching, etc. and may be out of the loop, but I just checked recent Treasury yields and as of yesterday we're looking at about 1.21% on the 1-year and 1.35% on the 2-year. That seems rather narrow and is in line with very limited movement of rates in the next year or two. (Why hold a 2-year at 1.35% if you could get say 1.21% on a 1-year now and maybe 1.6% if not more on another 1-year after the first one matures? Well, some do it anyway, depending on the actual use, but many would not accept that unless they don't think the 1-year rate is going up like that.)

For reference, the Fed's recent dot plot for FFR, which may be generally on the optimistic side:
Image
http://www.businessinsider.com/fed-dot- ... 017-2017-6

So maybe one increase later this year and another two in 2018 according to what they're thinking now, as some indication of potentially where short-term rates are going.

Is there just too much demand at 2 years right now, do people not think rates are going to actually keep going up in the nearish future, or what?
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saltycaper
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by saltycaper »

lack_ey wrote:... do people not think rates are going to actually keep going up in the nearish future, or what?
There does seem to be a divergence between market predictions and Fed predictions. The 2-10 spread also has shrunk quite a bit. It will be interesting to see if it falls below where it was last year. We're not far. Time will tell if the Fed is just a bit ahead of the market or if they are wrong. The past couple of inverted yield curves came at a time, or just after, a period of pretty hot growth. Hard to imagine something like that happening now, but who knows?

Going back to the 1-2 spread, I think the market is saying short-term inflation will be subdued, and the Fed is going to pause. However, I listened to some of Yellen's testimony, and I think there were a couple of questions for her related to market vs. Fed expectations, and she reminded questioners the presence of various risk premia make it difficult to use financial instruments to gauge expectations. It seems discrepancies are not large enough to warrant favoring bond market indicators over "professional forecasters."
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patrick013
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by patrick013 »

Foreign demand. Present and future spreads are expected to be
low for one reason. Demand in general has to lessen a bit.

Actually, account balances of TRSY's is expected to exceed total GDP
in a few years. So as the FFR rate continues to rise somewhat every
year the spreads are expected to be at the low end of the chart.

If stock markets crash then bond investors bet correctly.


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saltycaper
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by saltycaper »

Yesterday the 3-month was higher than the 6-month: 1.15 and 1.12, respectively. Today, a little wider with a 6 bps difference, 1.16 and 1.10. Seem inconsequential but a little odd.
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market timer
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by market timer »

saltycaper wrote:Yesterday the 3-month was higher than the 6-month: 1.15 and 1.12, respectively. Today, a little wider with a 6 bps difference, 1.16 and 1.10. Seem inconsequential but a little odd.
This inversion is being attributed to concern that the 3-month payment could be delayed due to a debt ceiling impasse: http://www.reuters.com/article/us-usa-b ... A52A5?il=0
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saltycaper
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by saltycaper »

market timer wrote:
saltycaper wrote:Yesterday the 3-month was higher than the 6-month: 1.15 and 1.12, respectively. Today, a little wider with a 6 bps difference, 1.16 and 1.10. Seem inconsequential but a little odd.
This inversion is being attributed to concern that the 3-month payment could be delayed due to a debt ceiling impasse: http://www.reuters.com/article/us-usa-b ... A52A5?il=0
Ahh, right. Thanks, MT.
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Doc
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by Doc »

On the longer end:
saltycaper wrote:The 2-10 spread also has shrunk quite a bit.
The 2 has gone up because of Fed action at the low end.
patrick013 wrote:Foreign demand. Present and future spreads are expected to be low for one reason. Demand in general has to lessen a bit.
I was told a few weeks ago by a Schwab bond expert that the longer rates have gone down because of foreign demand. Schwab should be in a position to know since they are an international broker.

If all this is "true" then central banks are the "culprits". The Fed is pushing short rates up because of their action and the ECB is pushing (US) rates down (demand up) because of their inaction. :annoyed
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grok87
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by grok87 »

saltycaper wrote:
market timer wrote:
saltycaper wrote:Yesterday the 3-month was higher than the 6-month: 1.15 and 1.12, respectively. Today, a little wider with a 6 bps difference, 1.16 and 1.10. Seem inconsequential but a little odd.
This inversion is being attributed to concern that the 3-month payment could be delayed due to a debt ceiling impasse: http://www.reuters.com/article/us-usa-b ... A52A5?il=0
Ahh, right. Thanks, MT.
thanks MT as well
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patrick013
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by patrick013 »

Doc wrote:On the longer end:
saltycaper wrote:The 2-10 spread also has shrunk quite a bit.
The 2 has gone up because of Fed action at the low end.
patrick013 wrote:Foreign demand. Present and future spreads are expected to be low for one reason. Demand in general has to lessen a bit.
I was told a few weeks ago by a Schwab bond expert that the longer rates have gone down because of foreign demand. Schwab should be in a position to know since they are an international broker.

If all this is "true" then central banks are the "culprits". The Fed is pushing short rates up because of their action and the ECB is pushing (US) rates down (demand up) because of their inaction. :annoyed
I was reading at one of the Fed websites, can't remember the exact one, but one
of their senior analysts wrote a forecast that specified low spreads, foreign
demand, and record demand expected in the future for all TRSY offerings as well
as continued low spreads. More and more people are buying TRSY's it says.
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by willthrill81 »

I know this is tangential to the thread, but you can get a 1 year CD for 1.55% right now, which beats the 2 year Treasury easily.
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Doc
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by Doc »

willthrill81 wrote:I know this is tangential to the thread, but you can get a 1 year CD for 1.55% right now, which beats the 2 year Treasury easily.
The current yield on the two is ~1.25%. I Do not have to pay state tax on the coupon. If the stock market tanks I can sell that T in about 30 seconds at a premium over par. That's a lot easier than having go through some hoops to sell the CD, wait for the money to transfer to my brokerage account, pay an early withdrawal penalty and forgo the price premium I am going to get from the Treasury which will spike in such a flight to quality situation.

You and I have a very different definition of "easily".

You should look at your entire portfolio in making this kind of decision. Looking at each position in isolation is not realistic.
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Re: What's with the narrow spread in 1-year and 2-year Treasury yields (~14 bp)?

Post by Doc »

patrick013 wrote:I was reading at one of the Fed websites ...
That's for the verification. I'm always a little suspect when I'm getting broker information over the phone..
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