Question

Is the current Treasury Bill Rate low or high? does the current interest rate make sense when you consider things such as the national debt, budget deficit, among other? Why or why not? . Is the shape of the treasury yield curve normal or abnormal?

Answer 1

Current Treasury Bill Rate is not low or high but moderate as it has impact of various factors like inflation, market conditions, cash flow in the economy, investors approach, returns earned by investor in market etc. Treasury Bill is the safest and risk less investment. It is a benchmark to the investor to earn minimum return as per treasury bill. Bankers also considers the treasury bill interest rate as base rate.

Current Interest rate make sense when we consider things such as the national debt, budget deficit, among other.

Reasons :

• In case of national debt it is a debt on nation and every individual in the country which paid through collecting taxes from citizens by government. Treasury bill gives assured return to investors, which indicates that the nation has moderate or in good condition that in economy there is ability to earn interest as low as equal to treasury bill interest or as high as market return. It gives assurance that there is enough cash flow and returns which will pay national debt.
• Budget deficit will impact treasury bill interest rate. As if there is high risk of deficit then in such case the Treasury bill rate is high as there is less amount of cash flow in the economy to generate returns. If deficit is low then there is low risk and then interest of Treasury bill will be low.
• Bankers, investors, government are considered Treasury bill as Benchmark to decide the Interest rates. Treasury bill interest rate is minimum rate of return with almost zero risk.
• Treasury bills takes care of inflation as if inflation is high then Treasury bill interest rate is high and if inflation is low Treasury bill interest rate is low.

The shape of the Treasury yield curve is normal. Treasury yield curve indicates as normal, inverted or flat.

• Normal Treasury yield curve indicates the stable and developing economy. It denotes lower yield to short term investments and higher yield for long term investments.
• Inverted Treasury yield curve indicates declining economy or slowdown in the economy. It denotes high yields in short term investments and low yields in long term investments.
• Flat Treasury yield curve indicates uncertainty in economy. It denotes same returns in short term investments and long term investments