Yield Curve Review: 2 Weeks Ending July 13th: Fear Bid Returned?

Includes: TLT
by: Pat Stout

Has the fear bid returned to the US Treasury market? Let's review the yield curve for the week June 29 to July 6th and July 6th to July 13th. The charts below show the weekly change in basis points. As you can see during the week ending July 6th all maturities declined in yield except for the 1-month T-Bill. And for the week ending July 13th the trend continued with the very short maturities moving higher in yield and longer dated issues moving lower in yield. For the two weeks ending July 13th interest rates fell across the yield curve with the exception of the 1-month and 3-month T-Bill yields.

Yield Curve Review.

For the week ending July 6th the one-month Treasury bill yield ticked up 2 basis points while the remainder of the yield curve saw lower yields. The fear bid might have returned to the Treasury market after the uninspiring gain of 80,000 nonfarm payroll jobs.

For the week ending July 13th yields at the very short end of the curve moved higher with longer dated issues seeing yields continue to move lower.

For the two weeks ending July 13th the one-month and three-month T-bill yields moved slightly higher with the remainder of the curve seeing lower yields of 1 to 18 basis points.

The trading range in yields so far in 2012, in basis points can be seen in the chart below.

The benefit to lower Treasury yields is lower government net interest spending. According to the Budget of the President in fiscal year 1982 gross federal debt was expected to be $1.134 trillion with $99.1 billion of net interest expense. This would be an average interest rate of 8.737%. For fiscal year 2011 the figures were $14.737 trillion in federal debt with $230 billion spent on net interest expense. This would be an average interest rate of 1.56%.

Had the 2011 federal debt of $14.737 trillion been required to pay 1982 levels of interest (8.737%) then the net interest spending would have been $1.287 trillion, not $230 billion. Lower interest rates have greatly reduced government spending.

The 10-year yield has been locked in a narrow trading range for the past month. The yield declined 15 basis points for the two-weeks ending July 13th ending at 1.52%. The closing low yield for the year is 1.47%. Time will tell if a new low is set.


It is tough to make a case for sharply lower or higher interest rates at this time. The market appears to be in a 20 basis point trading range. And is currently near the low yield level of the trading range.

Will negative yields be seen on US Treasuries? Tough to say, but if negative yields are seen then US Treasury Strips might trade at a premium to par. Never thought I see the day that would happen. Hopefully I don't as it might signal a deflation spiral that might create unknown and untold damage on the economy and confidence (business and consumer).

Something to think about.

$1 million invested at the 1982 average yield of 8.737% would generate yearly income of $87,370, or $239.37 per day, or $9.97 an hour.

$1 million invested at the 2011 average yield of 1.56% would generate yearly income of $15,600, or $42.74 per day, or $1.78 an hour.

Capital invested in US Treasuries in 1982 earned more per hour than the minimum wage, but in 2011 capital invested in US Treasuries earned less than the minimum wage.

A retiree in 1982 could enjoy $87,370 of before tax income from US Treasuries at the average interest rate paid of 8.737%. To maintain that level of income in 2011 at the average rate of 1.56% would require savings of $5.6 million.

The tax rate in 1982 was far higher than today therefore over the past 30 years the after-tax income earned on a 30-year Treasury was greater than original expected. Unfortunately, going forward it does not appear that can or will be the case.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.