The One- and Two-Year Treasuries

I thought this was a simple but fascinating graph. It shows the yields for the one- and two-year Treasuries.

The difference between the red and blue line reflects the expectations that the red line will increase. The wider the spread, the more the red line is expected to rise over the next year. In 2009, those expectations were massively wrong. Gradually, the spread got narrower and narrower until 2011 and 2012 when there was very little difference.

In the last year, there’s finally been some daylight between the two lines. While the one-year yield hasn’t moved much, the two-year is beginning to creep higher. It recently cracked 0.5%. By looking at the two lines we can infer where the market expects the one-year yield to be one year hence.

The takeaway is that the market expects the Federal Reserve to do nothing to interest rates in the short term, but it expects an increase about one year from today.

Posted by on July 9th, 2014 at 11:45 am


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