The Notch In the Yield Curve

This is an important point but it’s difficult for me to explain so please bear with me. Below is the current Treasury yield curve. The key part is the notch that extends out about three years (I added the red line to highlight the area). The blue line is pretty flattish and doesn’t start to rise until 2014 or 2015.

Embedded in any yield curve is a prediction of where short-term interest rates will be in the future. The steepness of the blue line indicates how quickly rates will rise.

What’s happened recently is that the market doesn’t expect rates to rise for some time. This is a direct response to the Fed’s throwing the towel announcement from earlier this week. In turn, this has led investors to crowd into gold.

Normally, a steep yield curve is very good for stocks (and banks). The problem is that steepness doesn’t really start on the yield curve until about three years out.

Posted by on August 11th, 2011 at 11:22 am


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