The Long End of the Treasury Curve

In the summer of 2012, the bond market reached incredible heights. On July 24, 2012, the yield on the 10-year Treasury fell to 1.39%. That was the lowest in the history of the republic. (That appears to be the case; these facts aren’t so easy to nail down.)

At the time, I thought that was at the end of the bond market’s amazing 31-year run. The 10-year had gotten to 15.84% on September 30, 1981, also the highest in the history of the republic. Now I’m not so sure the rally is over.

During 2013, Treasury yields bounced higher and the 10-year yield broke above 3%. But then something unexpected happened, the bond market began to rally again. By this past February, the 10-year got as low as 1.65%. That’s still above the July 2012 mark but the 20- and 30-year yields both reached new lows.

On January 30, 2015, the 30-year got down to 2.23% which was 22 basis points below its July 2012 low. The 20-year got to 2.04%, seven basis points below its July 2012 low.

So the longer-date parts of the yield curve have moved lower while the shorter part hasn’t. This means the spread between the two has narrowed. Is it worthwhile looking at the spreads of such long term bonds?

Generally, the higher longer-term bonds yield more than shorter-term bonds, the better the outlook for the economy. When the spread is low or even negative, that’s not so good for the economy. My preference is to look at the difference between the 2- and 10-year yields. The two-year note is short enough without being overly influenced by the Fed Funds rate.

I don’t think the long-end spreads are as important but it’s interesting to note that the spread between the 30- and 10-year bonds has been falling almost consistently for two years. The spread between the 20- and 30-year doesn’t strike me as particularly important.

Posted by on April 20th, 2015 at 12:07 pm


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