Question

Listed below are the yields of various Treasury securities on separate days over the last five years.

(1) Provide an explanation of the evolution of the Treasury yield curve from 2018 to 2020.

(2) Focusing on the 2020 yield curve, provide an interpretation of the curve? (What do you infer from it)

	Date	1 yr	2 yr	5 yr	7 yr	10 yr	20 yr	30 yr
(1)	10/05/20	0.12	0.14	0.27	0.46	0.68	1.23	1.45
(2)	10/05/18	2.64	2.88	3.07	3.18	3.23	3.34	3.40
(3)	10/05/15	0.26	0.61	1.35	1.74	2.07	2.52	2.90

Answer 1

Plotting, the three yield curves, we have the following graph -

Answer 1: In 2018, the Yield curve was very mildly increasing (almost flat) with the increasing number of years. Further, the 2-3 year for the yield curve is 2.6%, which is higher than what was observed in 2020.

In 2020, the yield curve is increasing with 30 year yield significantly more than 1 year yield (0.12 - 1.45). This shows that in 2018, the expectations may have been of an impending recession according to the data. As time passed, the normal expectations returned, which made near term less risky than longer term, making the curve curve upwards with increasing yields.

The shift in yield curve from 2018-2020 is downwards, this indicates lower inflation in the economy for 2020 as compared to 2018.

Answer 2: In 2020, the yield curve is rising with a significant upwards slope. Further, the near term yield lower than the longer term yield. The curve indicates that the investors expecting term interest rates to rise with time. Furter, in 2020, the interst rates have come down as compared to previous years, indicating lower rates in the economy and change in inflation expectations.