Must-know: What a steepening Treasury yield curve signals


Nov. 26 2019, Updated 1:59 p.m. ET

Economic and market risks impact Treasury yield curve

When market risk perceptions rise, both domestic and overseas investors flock to safe-haven assets. U.S. Treasuries are considered some of the safest assets in the world. They’re backed by the full faith and credit of the U.S. government. Higher demand pushes up bond prices, which reduces bond yields.

Treasury yields between two years and 30 years fell over the week. The decline was steepest for intermediate-term yields (IEI), with five and seven-year yields falling the most—each by 11 basis points (or bps) over the week.


Intermediate-term yields are more sensitive to changes in expectations on the rate hike, compared to longer-term debt. The yield curve steepened slightly as a result. We’ll cover the rate-hike outlook in greater detail in Part 10 of this series.

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Ten-year and 30-year yields (TLT) fell by 9 bps and 5 bps, to 2.22% and 2.98%, respectively. The decline in Treasury yields didn’t explain the whole story. There were wide swings on Wednesday. The ten-year Treasury (IEF) yield fluctuated from 2.21% at the day’s start, to a low of 1.87%, only to end the day at 2.15%.

Treasury ETF prices increase

Bond yields and prices move in the opposite directions. Due to the decline in yields, the prices of ETFs investing primarily in U.S. Treasuries rose over the week. The iShares Barclays 20+ Year Treasury Bond ETF (TLT), the iShares Barclays 7-10 Year Treasury Bond ETF (IEF), and the Vanguard Total Bond Market ETF (BND) rose over the week, by 0.9%, 0.7%, and 0.4%, respectively.

Eurozone and Ebola fears trigger Treasuries demand

Last week, the demand for U.S. Treasuries rose primarily on heightened global risks. Germany is the largest economy in the Eurozone. Fears of a recession in Germany and Europe sent ten-year German government bond yields tumbling to 0.74% last week, their lowest ever.

Ten-year U.S. Treasuries (UST) yielded 2.22% on Friday, compared to 0.85% for the ten-year German federal bond. This factor, along with the appreciating U.S. dollar, made U.S. Treasuries relatively more attractive compared to their developed market counterparts.

Fears of the Ebola epidemic that had surfaced in the U.S. the previous week, and was making its presence felt in other parts of the world, also had an impact.

Initial jobless claims, housing starts result in higher Treasury yields

As we’ve mentioned in earlier weekly updates, the domestic economy hasn’t really given cause for the kind of dramatic flight-to-safety flows that were apparent last week. Economic data towards the beginning of the week, however, was slightly negative. This included retail sales in September, which posted a monthly decline of 0.3%. Negative economic data also lowers yields and raises prices of safe-haven debt securities like U.S. Treasuries.

The release of positive economic data towards the end of the week caused Treasury yields to rise. Initial jobless claims in the week ended October 11, fell to 264,000, the lowest level since April 15, 2000. Housing starts rose by 6.3% month-over-month to 1.017 million in September, beating expectations. Both labor and housing market data are critical for the economic recovery. U.S. stocks (SPY) rallied on Friday as a result.

The slight steepening of the yield curve, as discussed earlier, also implies a benign near-term economic outlook. Long-term risks are greater, relative to short-term risks in the economic outlook.

In Part 10 of this series, we’ll discuss more about what these factors mean for U.S. bond markets and the Fed’s monetary policy. In our next part, we’ll look at the impact of these factors on the secondary market for corporate bonds (BND).


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