Question

Analyze the U.S. term structure of interest rates. Your answer should include a “picture” of the current U.S. Treasurys yield curve (note the date you use), an exposition of the basic theories trying to explain the yield curve, and your composite explanation of what the current yield curve is predicting. Be sure to provide the reasoning/theory(ies) underlying the predictions you present.

Answer 1

Term structure of interest rate is a relationship between interest rates and bond yield .it can reflect through the relation between short term bond yields as well as the long-term bondss in relation with the change in the interest rates in the an economy.

Present scenario the interest rates in the US economy is currently in the range of 0 to .25 which has been slashed after the fears due to Contagion spreading through coronavirus leading to shutting down of various economies, and due to these shutdowns, experts are expecting an impending global recession so in an proactive measure, the Federal Reserve has slashed the interest rates to the minimum possible rates to stimulate the demand in the US economy.

This had led to the flattening of the yield curve. this is such because the short term interest rates and the long term interest rates are almost in the similar range because people are not expecting any recovery in the demand in the coming future and they are expecting the similar type of situation to prevail for a longer period of time so there is no premium for the long term bond yields and they are selling cheap.

when the crisis unfolded at a point of time, the yield curve inverted which is a warning for an impending recession during which the short term bond yield went higher than the long term bond yields, so there was so much pessimism in the overall economy that in the coming decade, the U.S economy is headed to a severe recession according to the yield curve.

A normal curve reflects a growing economy in which the long-term bond yields are higher than the short term bond yields, but when that Inverts, that means that there is an impending recession on its way, and when the economy slowly recovers, it can be reflected through flattening of the yield curve and when it goes back to the normal, then normal yield curve, start again showing up.

So this is a cycle of of term structure of interest rates and interrelation of yield curve.