Category: inverted yield curve

Visualizing (and Understanding) an Inverted Yield Curve


This post is by Dorothy Neufeld from Visual Capitalist


Visualizing (and Understanding) an Inverted Yield Curve

For a few months in 2019, the yield curve inverted and warned of a potential recession.

Towards the end of 2021, it happened again. And throughout 2022, the inverted yield curve has looked more and more extreme. So what does an inverted yield curve look like, and what does it signal about an economy?

The above visualization from James Eagle shows the yield curve from November 2021-2022 using eurodollar futures yields—which serve as an indicator for the direction of the yield curve.

What Denotes an Inverted Yield Curve?

Generally speaking, the yield curve is a line chart that plots interest rates for bonds that have equal credit quality, but different maturity dates.

In normal economic conditions, investors are rewarded with higher interest rates for holding bonds over longer time periods, resulting in an upward sloping yield curve. This is because these longer returns factor in the risk of inflation or default over time.

So when interest rates on long-term bonds fall lower than those of short-term bonds, it results in an inverted yield curve.

The worrying trend is that an inverted yield curve in key government securities such as U.S. Treasuries can often foreshadow a recession. For every recession since 1960, an inverted yield curve took place roughly a year before, with just one exception in the mid-1960s.

This is because the yield curve has steep implications for financial markets. If the market predicts economic turbulence, and that interest rates (Read more...)

Visualizing 40 Years of U.S. Interest Rates


This post is by Dorothy Neufeld from Visual Capitalist


The following content is sponsored by Citizens.

Visualizing 40 Years of U.S. Interest Rates

In just six months, the Federal Reserve has hiked interest rates by 300 basis points in one of the fastest rate increases in decades. By the end of 2023, rates could rise to 4.50-4.75%.

Yet in spite of these increases, rates still fall below historical averages.

In Part 1 of our Seizing Capital Opportunities series from Citizens, we show interest rate trends over modern history, and the implications of increasingly hawkish monetary policy in today’s environment.

U.S. Interest Rates: Reversing the Trend

For decades, U.S. interest rates have fallen due to structural factors including slower GDP and employment growth.

But with COVID-19, trillions in fiscal stimulus, and Russia’s invasion of Ukraine, demand dynamics have dramatically shifted. U.S. inflation hit 40-year highs, met with a strong labor market. As a result, the Federal Reserve has made aggressive moves to raise rates to prevent the economy from overheating.

Below, we show average annual 10-year Treasury yields, a proxy for U.S. interest rates, and their annual percentage change since 1980. Data is as of October 5, 2022.

YearAverage U.S.
Interest Rate
Annual Percentage
Change
2022*2.7%156%
20211.5%63%
20200.9%-52%
20192.1%-29%
20182.9%12%
20172.3%-2%
20161.8%8%
20152.1%5%
20142.5%-29%
20132.4% (Read more...)

Animation: Visualizing U.S. Interest Rates Since 2020


This post is by Dorothy Neufeld from Visual Capitalist


Visualizing Interest Rates Since 2020

In March 2020, the U.S. Federal Reserve cut already depressed interest rates to historic lows amid an unraveling COVID-19 pandemic.

Fast-forward to 2022, and the central bank is grappling with a very different economic situation⁠ that includes high inflation, low unemployment, and increasing wage growth. Given these conditions, it raised interest rates to 2.25% up from 0% in just five months.

The above visualization from Jan Varsava shows U.S. interest rates over the last two years along with its impact on Treasury yields, often considered a key indicator for the economy.

Timeline of Interest Rates

Below, we show how U.S. interest rates have changed over the course of the pandemic:

DateFederal Funds Rate (Range)Rate Change (bps)
July 27, 20222.25% to 2.50%+75
June 16, 20221.50% to 1.75%+75
May 5, 20220.75% to 1.00%+50
March 17, 20220.25% to 0.50%+25
March 16, 20200.00% to 0.25%-100
March 3, 20201.00% to 1.25%-150

In early 2020, the Federal Reserve cut interest rates from 1% to 0% in emergency meetings. The U.S. economy then jumped back from its shortest recession ever recorded, partially supported by massive policy stimulus.

But by 2022, as the inflation rate hit 40-year highs, the central bank had to make its first rate increase in over two years. During the following Federal Reserve meetings, interest rates were then hiked 50 basis points, and then 75 basis points two times shortly after.

Despite (Read more...)