uploads///US Treasuries Yield Curve

Is the Treasury Yield Curve Getting Flatter?

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Aug. 27 2015, Published 12:02 p.m. ET

What is a flattening yield curve?

A flattening yield curve is a situation in which the difference between yields of short and long maturity securities has reduced from its historical trend. In a healthy economy, a yield curve is positively sloping. That is, yields rise as the maturity of the bond increases.

So the yield on a ten-year security would be higher than on a two-year security. This is so because investors need to be compensated for investing in the long term. An uncertain future always makes longer-term securities riskier than shorter-term securities.

Extending this logic, a flattening yield curve shows that investing in longer-term bonds isn’t compensating investors for the additional risk as much as it used to.

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US Treasury yield curve getting flatter

As you can see in the above graph, the U.S. Treasury yield curve is flatter than it was a year ago. Short-term bills and notes (SHY) yields, except on the one-month bill, have risen from a year ago. Yield on the one-year bill was up 26 bps (basis points) from the same time a year ago.

From there on, the difference in yields falls, with yield on the three-year note being unchanged from last year. Yields continue falling, peaking at a difference of 48 bps at the 20-year bond (TLT) from a year ago.

What does it mean for you?

For investors, a study of a change in yield curve and spreads between various maturities can give insights into opportunities in the fixed-income market. For corporates issuing high-grade bonds, the yield curve getting flatter can lead to issuance of longer-duration bonds.

Recently, companies such as Celgene (CELG), Intel (INTC), and UnitedHealth Group (UNH) have issued a sizable portion of their high-grade bond issues in the ten-year maturity and above category.

In the next article, we’ll see why the U.S. Treasury yield curve is getting flatter.

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