A Yield Curve Analysis and its Impact on Future One Year Rates for the Week of 11/5/12-11/9/12
By: Ben Nihart
I analyzed the yield curve each day throughout the week of November 5th-9th, and found some significant events that caused the movement along the yield curve. In this analysis, I will detail each event and explain its impact on US Treasury yields. I will also explain the impact these events had on the future one year rates. When I signed up to do this project, I signed up for this week for a particular reason. With the upcoming presidential election, I knew that this week would be one with a lot of activity on the yield curve. I couldn’t have been more right. What I did not realize was there would be a looming “fiscal cliff”, and the sale of bonds that would cause the yield curve to flatten dramatically over the week, which can be seen in the chart below.
I felt it necessary to start my findings this week with a look at Tuesday, also known as Election Day. I found it particularly interesting because it was the only day last week that saw the bond market suffer. I believe bond prices fell because looming debt supply coming later in the day and week. I also believe it was due to speculation on who might win the election. I was led to this conclusion by my knowledge of each presidential candidate’s economic policy, and also an article written by Min Zeng of the Wall Street Journal. In this article the he writes, “In recent weeks, a win by Republican candidate Mitt Romney has been perceived on Wall Street as good for stocks and bad for Treasury bonds. The rationale is Mr. Romney's economic policy could be more business-friendly and would encourage investors to favor riskier assets. Also hurting Treasury bonds is the risk that the Federal Reserve could raise interest rates earlier than it pledged. Mr. Romney has been critical of the Fed's low-rate policy and has threatened to replace Fed Chairman Ben Bernanke, who has spearheaded...
Cited: Kenny, Thomas. "What Is the Fiscal Cliff?" About.com Bonds. N.p., n.d. Web. 12 Nov. 2012. <http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm>.
Kruger, Daniel. "Treasuries Gain for Third Week as Voters Elect Budget Standoff." Bloomberg. N.p., 9 Nov. 2012. Web. 13 Nov. 2012. <http://www.bloomberg.com/news/2012-11-10/treasuries-gain-for-third-week-as-voters-elect-budget-standoff.html>.
Lopez, Luciana, and Ellen Freilich. "TREASURIES-Prices up before U.S. Vote; Greece Still Worries." CNBC.com. N.p., 5 Nov. 2012. Web. 13 Nov. 2012. <http://www.cnbc.com/id/49700043>.
Lopez, Luciana, and Ellen Freilich. "TREASURIES-Prices Jump as Obama Win Drives Monetary Policy View." CNBC.com. N.p., 7 Nov. 2012. Web. 8 Nov. 2012. http://www.cnbc.com/id/49732686
Lopez, Luciana, and Ellen Freilich. "TREASURIES-Bonds Jump after Strong Demand at Auction." CNBC.com. N.p., 8 Nov. 2012. Web. 8 Nov. 2012. <http://www.cnbc.com/id/49747829
Matthews, Dylan. "QE3 is on! Fed to buy $85b through December, and then keep going." Washington Post: Breaking News, World, US, DC News & Analysis. N.p., 13 Sept. 2012. Web. 13 Nov. 2012. <http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-is-on/>.
Zeng, Min. "Treasury Bonds Fall on Election Day as Investors Favor Stocks." Wall Street Journal. N.p., 6 Nov. 2012. Web. 7 Nov. 2012. <http://online.wsj.com/article/BT-CO-20121106-715048.html>.
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