About Treasury Bond Interest Rate and Yield Curve
Bond prices are inversely related to the rate of interest of bonds, otherwise known as bond yields. When bond prices rise, yields tend to drop, and vice versa. Understanding how bonds work is crucial as it gives us valuable insights into the risk appetite of the market.
Through the calculated spread (difference) between bond yields, we can tell how much fear or greed is in the risk market. Shorter-term bonds normally yield less than longer-term bonds that normally yield more. A narrower spread indicates heightened fear, while a wider spread indicates more greed.
When you see an inverted yield curve (meaning the short-term yield rises above that of the long-term bonds), this is a bearish indicator and a sign of a weakening economy and in some cases, an oncoming recession. As an example, see the yield curves in the following periods,
- Jan - Dec 2000
- Feb 2006, Jun 2006 - May 2007
We all know what happened in the 6 to 12 months after that!
Click the Month/Year scroll button below the yield graph and drag horizontally to see show the yield curve during that month with the corresponding point in the Dow Jones Index indicated with the orange dot.