Question

The day after Pres. Trump was surprisingly elected in 2016, the US Treasuries yield curve got steeper. There was no change in short-term interest rates. Trump’s election surprised everyone. Trump, unlike his opponent Secretary Clinton, had promised a big tax cut. Why did the surprise election of a candidate who promised a big cut in taxes cause the yield curve to get steeper, even though it would be a full year before the tax cut bill was written, voted on, signed into law, and implemented? Would the effect on the yield curve have been the same if Trump’s election had been widely anticipated, rather than the surprise it was? Explain.

Answer 1

An yield curve is basically a dotted line that incicates the existing interest rates on bonds. The yield curve basically helps one gain an idea or understanding on what can be expected on the future rate of interests. The Treasury yield curve depicts/indicates the variation between the long and short trem treasury bills that are issued. There are basically 3 types of yield curves:

1.Normal (Upward Sloping)- indicating growth or expansion of the economy

2. Inverted (Downward Sloping)- Indicating a recession in the economy

3. Flat

A steeper yield curve in the question indicates that there was an increase between the the interest rates on the long-term and short-term treasury bills. the steeping of the curve indicates that investors after trump's election expected the economic activities to go under an expansion thus raise in interest rate.

Expectation and uncertainity are 2 of the several reasons that ,may cause a change. People were uncertain about the election and when the results came in, investors expected the change in the economy causing the long and short trem bond rates to vary.

Investors may have panniced and expected that the yield of the long-termbonds would raise faster then the short-run bonds and people would invest in them to avoid uncertainities due to policy changes that trump may apply. If people would have expected that trump would be elected, there may not have been a change at this magnitude.