Definition
The above chart reflects the short, intermediate, and long-term rates of US Treasury securities using 3 month, 6 month, 1, 2, 3, 5, 7, 10, 20, and 30 year treasuries.
It plots the yields of these securities against their respective maturities, with the yield on the vertical axis and the time to maturity on the horizontal axis.
Interpretation
The shape of the yield curve reflects the relationship between the yields of different Treasury securities.
In a normal yield curve, short-term Treasury securities have lower yields than long-term Treasury securities, indicating that investors expect interest rates to rise over time.
A flat yield curve occurs when the yields on short-term and long-term securities are similar, indicating that investors do not expect interest rates to change significantly in the near future.
An inverted yield curve occurs when short-term Treasury securities have higher yields than long-term Treasury securities, indicating that investors expect interest rates to fall in the future.
The swap curve is the swaps equivalent of the yield curve and is used to infer the market's expectations for future interest rates. It shows the fixed portion of a plain vanillia interest rate swap.
An interest rate swap is a financial contract between two parties to exchange a fixed interest rate for a floating interest rate or vice versa. In an interest rate swap, the two parties agree to exchange a series of cash flows based on a notional principal amount.
Swap rates incorporate a forward expectations for LIBOR, as well as liquidity, supply and demand, and the credit quality of the banks.
Typically, a swap curve will be upward sloping, meaning that the longer the maturity of the swap, the higher the interest rate will be. This is often referred to as a "normal" or "positive" yield curve.
However, there are times when the swap curve may be downward sloping or inverted, which can indicate that the market is expecting interest rates to fall in the future. An inverted swap curve is often seen as a sign of economic uncertainty or recessionary conditions.
Swap curves are widely used in the fixed income market to price and value fixed income securities. They are also used as a benchmark for pricing other financial instruments such as bonds, loans, and mortgages.
The swap spread curve shows swap spreads accross different maturities. A swap spread is the difference between the fixed interest rate of a plain vanilla interest rate swap and the yield on a corresponding Treasury bond with a similar maturity.
In other words, the swap spread is the difference between the interest rate paid by a fixed-rate instrument and the yield of a similar maturity Treasury security. A swap spread is used as an indicator of credit risk and market liquidity. It can also be used to assess the relative value of fixed-income securities, as well as to determine the demand for interest rate swaps.
Swap spreads are widely followed in the financial markets and can be an important factor in the pricing and trading of fixed-income securities. Generally, a widening of the swap spread is seen as a sign of increasing credit risk or illiquidity in the market, while a narrowing of the spread indicates improving credit conditions or market liquidity.
The shape of the swap spread curve can provide information about the market's expectations for future interest rates and credit risk. For example, a steeply upward-sloping curve (also known as a positive curve) can indicate that the market expects interest rates to rise in the future. Conversely, a flat or inverted curve can suggest that the market is pricing in a lower level of interest rate volatility or heightened credit risk.
The MOVE Index is similar to the VIX index for equities, but the MOVE index measure fear in the bond markets.
The MOVE Indexis a measure of the implied volatility of U.S. Treasury bond options, specifically options on the 10-year Treasury note.
The MOVE Index measures the market's expectation of the magnitude of changes in the yield of the 10-year Treasury note over the next 30 days, based on the prices of options contracts.
When the MOVE Index is high, it suggests that investors anticipate large fluctuations in Treasury yields, which can indicate uncertainty or heightened risk in the bond market. Conversely, a low MOVE Index may suggest that investors anticipate stability in Treasury yields.
The MOVE Index is often used by fixed income traders and investors to gauge market sentiment and to help assess the risks of investing in the bond market. A sudden increase in the MOVE Index can signal a market event or unexpected news that may impact Treasury yields and potentially cause volatility in other markets.
The 10-year vs. 1-year Treasury spread, also known as the yield curve spread or yield curve slope, is a measure of the difference between the yields on 10-year and 1-year U.S. Treasury bonds.
The yield curve spread is calculated by subtracting the yield on 1-year Treasury bonds from the yield on 10-year Treasury bonds.
A positive yield curve spread means that the yield on the 10-year Treasury bond is higher than the yield on the 1-year Treasury bond, indicating that investors expect long-term interest rates to be higher than short-term interest rates in the future. This is a normal yield curve and reflects the expectation that the economy will continue to grow over time.
A negative yield curve spread, on the other hand, means that the yield on the 1-year Treasury bond is higher than the yield on the 10-year Treasury bond, indicating that investors expect short-term interest rates to be higher than long-term interest rates in the future. This is an inverted yield curve and can be a warning sign of an economic recession, as it suggests that investors are more worried about the near-term outlook than the long-term outlook.
The yield curve spread is closely watched by economists, policymakers, and investors as it can provide important insights into the state of the economy and the future direction of interest rates.