Wednesday, May 20, 2009

Bond Yields May Signal a Recovery

The gap between short- and long-term Treasury rates is approaching a record as the U.S. economy shows signs of recovery and the government floods the market with new debt.

The gap between two- and 10-year Treasury yields was as wide as 2.360 percentage points at one point Tuesday, the most since the 2.619 points hit in November and nearing the August 2003 peak of 2.747 points. The gap ended Tuesday at 2.352 points, as the 10-year note fell 9/32 point, or $2.8125 for every $1,000 invested, to 99 to yield 3.243%, while the two-year note rose 1/32 point to 99 31/32, lowering its yield to 0.891%. Prices and yields move inversely.
[Treasury Yields]

Strategists said the gap could exceed three points. Two-year yield is expected to remain anchored by the Federal Reserve's interest-rate target of 0% to 0.25%. But the yield on the 10-year note is expected to rise amid a surge of new government debt and as investors sell existing government debt as they look to move out of these safe investments. Until the Fed starts to reverse its stimulative monetary policies and starts raising interest rates, the curve is likely to remain steep.

Investors profit from a steepening yield curve by buying two-year notes and selling 10-year notes. The steeper the curve, the bigger the profit potential. Banks benefit as they can borrow funds at cheap short-term rates and invest in higher-yielding long-term assets.http://online.wsj.com/article/SB124274038273134537.html

Yield curve explained: http://en.wikipedia.org/wiki/Yield_curve

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