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James Li
James Li
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New Feature Announcement: The Yield Curve

We have added a new 'US Treasury Yield Curve' page to our website

January 29, 2018

We are pleased to announce that we have added a new page titled “U.S. Treasury Yield Curve.”

Definition of yield curve

According to Investopedia, the yield curve graphs the relationship between bond yields and bond maturity. More specifically, the yield curve captures the perceived risks of bonds with various maturities to bond investors.

The U.S. Treasury Department issues bonds with maturities ranging from one month to 30 years. As bonds with longer maturities usually carry higher risk, such bonds have higher yields than do bonds with shorter maturities. Due to this, a normal yield curve reflects increasing bond yields as maturity increases. Figure 1 shows a normal yield curve.

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Figure 1

However, the yield curve can sometimes become flat or inverted. In a flat yield curve, short-term bonds have approximately the same yield as long-term bonds. An inverted yield curve reflects decreasing bond yields as maturity increases. Such yield curves are harbingers of an economic recession. Figure 2 shows a flat yield curve while Figure 3 shows an inverted yield curve.

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Figure 2

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Figure 3

GuruFocus Yield Curve page highlights

You can access the Yield Curve page by clicking the “U.S. Treasury Yield Curve” item under the “Market” tab. As illustrated in Figure 4, the Yield Curve item is located right above “Buffett Assets Allocation.”

Figure 4

The GuruFocus Yield Curve page contains the following sections: Header, Current Yield Curve, Historical Yield Curve and Yield Curve Definition.

The Header section gives you the one-month yield, the one-year yield, the 10-year yield and the 30-year yield as of the current date. On the other hand, the Current Yield Curve section contains two charts. The chart on the left shows the current yield curve and the yield curves from each of the past two years. You can remove a yield curve from the chart by clicking on the desired year from the legend.

The chart on the right graphs the historical spread between the 10-year bond yield and the one-year bond yield. Figure 5 shows a sample chart showing the yield curves from the past three years. Figure 6 shows the historical spread chart.

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Figure 5

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Figure 6

The Historical Yield Curve section also includes two charts, including an interactive chart on the right. As illustrated in Figure 7, the yellow line allows you to view the yield curve for a specific month and year.

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Figure 7

The chart on the left illustrates the yield curve for the time period selected using the yellow line. If you click on the “Play” (►) button, you can watch how the yield curve changes month over month. Click on the “Pause” ( ▌▌) button to stop the yellow line. Figure 8 illustrates the changes in the yield curve.

Figure 8

You can add additional yield curves to the left chart by clicking the “Plus” (+) button located underneath the chart. Once you click on the (+), you should see a “Month Select” pop-up window like the one shown in Figure 9.

Figure 9

By default, the month select window shows the current year and the 12 months. You can add the yield curve for a specific month by clicking on the desired month.

Click on the “<<” to view the previous year or “>>” to view the next year. If you click on the year, the pop-up window will list the 10 years for the current decade, allowing you to select the desired year more easily. Clicking on the decade allows you to select a different decade from the current century. Please see Figure 10 for a flow chart illustrating the month select window. For example, click on the “Jan” item in the rightmost image of Figure 10 to add the yield curve for January 2017.

Figure 10

How is the yield curve helpful?

We mention in the “Yield Curve Definition” section that historically, economic recessions occur when the spread between the 10-year yield and the one-year yield is less than zero. If you look carefully at the historical spread chart (see Figure 6) or the interactive chart (see Figure 7), you will notice gray bars throughout the charts. These bars indicate the past U.S. recessions since 1967.

A quick look at Figure 6 suggests that an economic recession generally follows once the yield spread drops below 0% (the red Y-axis). This is especially true for recessions during the late 1900s. The yield spread reached an all-time low of -3.10% around April 1980, during the economic recession of the early 1980s.

According to a GuruFocus Forum post, one limitation of Warren Buffett (Trades, Portfolio)’s market indicator is that it only tells you how overvalued the U.S. market is and the expected return of the market in the next eight years. An inverted yield curve, on the other hand, has historically predicted the past economic recessions according to the yield curve page.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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