Seal of the United States Department of the Treasury (Photo credit: Wikipedia)
Today we very briefly focus on the dynamics we have observed in the US Treasury Yield Curve between two critical dates:
1. The Yield Curve at 30 September 2013 – The day before the US government shutdown officially began
2. Friday 11 October 2013, exactly 11 days into the White House, Congress and Senate stand-off
What can clearly be observed from the Yield Curve for Treasury Bills (T-Bills) dated 30 days is that the spread between 30 September 2013 (at 0.10%) to the rate at 11 October 2013 (0.26%) has significantly increased and that the Yield Curve has become inverted. Normally the sign of a recession or other financial calamity to come.
Will Thursday 17 October 2013 be D-Day (for Disaster or Domino-day) when the whole lot starts tumbling down again?
THIS POST IS A YEAR IN THE MAKING.
Wipe our Debt (Photo credit: Images_of_Money)
We discovered it unpublished in our web archive today and as the theme is still very relevant today, we decided to publish it:
Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.
The first graphic highlights one important issue. We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve. If we cast our minds back to 2 August 2012 two key facts emerge:
- This was the D-Day of the US Debt Ceiling vote
- The US still had a Triple A credit rating
The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.
However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.
The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over. The second is the Italian Bond Maturity curve. You will notice just how similar the USA and Italy Debt Maturity profiles are.
From this comparison, the critical question currently for us is:
Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months? QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free. It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.
PS. Off course QE was the option and still remains so, for the moment…
US Treasury Seal (Source: Wikipedia)
We resume our intermittent analysis of the US Treasury Yield Curves today with a comparison between the mid July 2013 versus mid July 2012 (in chart 1) and mid July 2013 versus mid July 2011 (chart 2). Chart 1 – Mid July 2013 versus mid July 2012 In the absence of any meaningful data on ‘proper’ yield curve rates, this analysis will have to do. Chart 2 – Mid July 2013 versus mid July 2011 Finally, we compare mid July 2013 versus mid July 2007 (chart 3), the last time we experienced an Inverted Yield Curve and had any meaningful Yield Curve data. Note that the short versus longer term yield rates had a much flatter yield rate curve than in the recent past. This is partly a reflection on the risk profile of financial gilt debt instruments back in 2007 versus today. Chart 3 – Mid July 2013 versus mid July 2007 theMarketSoul ©2013
Department of Treasury Seal (Photo credit: woodleywonderworks)
We take a brief look at two interesting Treasury Yield curves today.
The first Yield Curve takes a snapshot view of the yield curves at the end of Q1 2011 and Q1 2012.
What is very noticeable is the fact that the overall yields for the end of Q1 2012 is significantly lower than a year ago. Taking a look at the at the 5 year T-Note yields as an example, the spread between the end of March 2011 (5Yr T-Notes at 2.24% ) and the end of March 2012 (5Yr T-Notes at 1.04%) was 1.20% down. The question is what factors drove down the ‘risk-free’ rate on US Treasuries?
However, turning our attention to the second graph below, indicates a slightly different perspective; and hence the title of this post. Has and is risk returning to the capital and stock markets to levels we previously experienced?
Not quite, is the short answer, because the spread between 31 December 2011 (0.83%) versus the 1.04% rate at the end of March 2012, only indicates an uptick of 21 basis points in the yield rate. The significance is not the percentage spread, but rather the direction of movement and we will continue our analysis at the end of Q2 2012 to establish whether the direction in Q1 2012 will be maintained into Q2 and beyond.
The final question to ponder is this:
Are we finally seeing the corner turned, or are there still significant risks in the global economy and sovereign debt markets to cause a few further after shocks in the months to come?
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”
They win both ways!
Source Material: US Treasury web site:
Image via Wikipedia
As a general introduction today we will look at two US Treasury Yield curves. The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.
Yield Curve 1
In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate. The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011. There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.
The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011. As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.
Yield Curve 2
In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site)
It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.
Source Material: US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx
It is a confidence thing.
We are so very, very close to seeing and experiencing another colossal collapse in confidence in the world’s financial system.
This time it is driven by the ‘US Debt Ceiling impasse’. A steady flight to gold has been taking place over the past few months and even though most informed commentators believe the US Treasury ‘default scenario’ is not likely to physically occur, the mere threat of a default has not yet managed to ‘focus the minds’ of the US congress house of representatives locked in an ideological battle over fundamental economic policy and direction.
Image via Wikipedia
At stake here is a scenario that will make the 2008 financial crisis wane into insignificance, should the threat of a US Treasuries default actually play out.
Yet, very few mainstream headlines outside of the United States have been published about this potential catastrophic event. And we are only a few days away from the edge of disaster (Default D-Day is chalked up for Tuesday 2 August 2011) and the Washington Post has a default clock ticking down on this deadline web site.
If a default actually occurs, confidence in the international capital and currency markets will have been breached and no serious commentator has yet fully quantified or effectively mapped out the potential consequences of this potentially disastrous collapse in capital market confidence.
The only significant contribution we can make at this publication is to cross our fingers, hold as much in cash and liquid (non US dollar) assets and hope that some real focus and a meeting of minds occurs before Tuesday 2 August 2011 on Capitol Hill.