Bond Yield Analysis

EndGame Macro: The 30-year TIPS yield just crossed 2.72% a level we haven’t seen in decades. It means investors are demanding 2.72% above inflation to hold that bond for the next three decades. That’s a seismic move. Here’s what it’s telling us: 1. Investors Want Real Compensation: Markets are demanding a much higher return after inflation to hold long-duration government debt. That implies fading trust in both inflation stability and fiscal prudence. 2. A Crack in Long-Term Confidence: When real yields rise sharply, it often means the market is starting to price in risk either from uncontrolled inflation, weakening Fed credibility, or excess debt issuance that’s swamping demand. 3. Policy Has Lost Its Anchoring Effect: Historically, the Fed’s forward guidance kept long-end real yields contained. That’s breaking down. Today’s surge is not due to optimism it’s a stress signal. 4. Structural, Not Cyclical: This isn’t a one-off blip from CPI volatility or a Fed hike surprise. It reflects long-term structural stress: debt saturation, shrinking foreign demand, and a shrinking pool of natural buyers for 30-year bonds. Why It Matters to You? Rising TIPS yields can reshape the entire investment landscape. It affects: •Long-term mortgage rates •Corporate borrowing costs •Valuations for equities and real assets •Portfolio hedging decisions It’s also a warning sign. When the market demands this much compensation for holding “safe” U.S. debt over 30 years, it means the system is pricing in uncertainty, not stability. Bottom Line: The 30-year TIPS is flashing red not because inflation is rising now, but because long-term belief in the system’s ability to contain it is breaking down. It’s not a blip it’s a barometer of structural fragility.

The 10-Year Treasury Yield — Decoding Economic Signals Through History Understanding the 10-Year US Treasury Yield is akin to reading the economy’s pulse. This long-term interest rate isn’t just a number—it’s a narrative of investor sentiment, policy impacts, and economic turning points. Historical Insights: The Yield as a Crisis Barometer → 1790s–1930s: The yield spiked during early crises like the Panic of 1819 (6.5%) and the Panic of 1837 (10.2%), reflecting investor panic and liquidity crunches. During the Great Depression (1929–1939), yields collapsed to 2.3% as investors fled to safe-haven assets. → 1980s Volatility: The yield surged to a record 15.8% in 1981 as the Fed battled hyperinflation under Paul Volcker, triggering a recession but ultimately stabilizing prices. → 2008 Global Financial Crisis: Yields plummeted from 5% (2007) to 2% (2008) as investors abandoned risk assets, signaling a flight to safety. Why the 10-Year Yield Matters → The Inversion Signal: When short-term rates (e.g., 2-Year Treasury) exceed the 10-Year yield, the yield curve inverts. This inversion preceded 7 of the last 8 recessions, including 2001 (Dot-com crash) and 2008 (GFC). → Fed Policy Ripple Effect: While the Fed controls short-term rates, the 10-Year yield reflects long-term growth and inflation expectations. Aggressive rate hikes (e.g., 2022–2023) often flatten the curve, foreshadowing economic slowdowns. → Global Safe-Haven Demand: During crises (e.g., COVID-19 in 2020), yields drop as global capital floods into US Treasuries, underscoring their role as a financial “safe harbor.” Modern Era Dynamics (2000–2025) → Post-2008 Quantitative Easing: The Fed’s bond-buying programs suppressed yields to historic lows (1.5% in 2012), fueling cheap borrowing but distorting traditional signals. → 2020–2022 Whiplash: COVID-19 drove yields to 0.5% in March 2020, but the 2022 inflation surge and Fed hikes pushed them to 4.25% by late 2023—a 30-year high. → Today’s Watchpoint: The current yield (4.0–4.5% range as of 2024) reflects market bets on a “soft landing” versus recession risks. Key Takeaways for Finance Professionals → Risk Management: A flattening curve suggests tightening credit conditions—critical for adjusting portfolios or advising clients. → Corporate Borrowing: Rising 10-Year yields increase long-term debt costs, impacting balance sheets and capital allocation strategies. → Mortgage Rates: The 10-Year yield heavily influences 30-year mortgage rates, shaping real estate markets and consumer spending. Final Thought The 10-Year Treasury Yield is more than a metric—it’s a mirror of collective economic psychology. From the Panic of 1819 to today’s inflation battles, it has consistently warned of storms ahead. As finance leaders, how do you interpret its signals in your strategic decisions? #Finance #Quant Finance #EconomicIndicators #TreasuryYield #RecessionRisk #FederalReserve #FixedIncome #CorporateFinance #RiskManagement

Bond yields moved higher in the first two months of the year as the market repriced #Fed expectations. But what’s the outlook for interest rates and fixed income investments as we kick off March?   While we anticipate another healthy employment number this Friday, we still expect 75bps of cuts in 2024, starting midyear. Our near-term range on the 10-year US Treasury #yield is 4% to 4.5%, before moving toward 3.5% by year-end.   While a temporary move toward the top of that range is possible, we believe this would likely require a shock in the form of materially higher #growth or inflation, and we would be strong buyers around the 4.5% level.   In terms of positioning, CMBS continues to outperform, particularly the lower-rated BBB segment. We remain most preferred in the higher-quality CMBS sector. While spreads tightened over the past six weeks, CMBS remains cheap relative to their corporate credit counterpart.   With inflation expectations rising, TIPS have outperformed their Treasury counterparts, and we remain with a preferred allocation in 5-year TIPS given we still think inflation will remain above the Fed’s 2% target this year. Read more in the full report below from Leslie Falconio and John Murtagh.

What's behind the rapid increase in long-dated bond yields? Over the last few weeks bond markets have been on the move: 30-year Treasury yields have rapidly surged from below 4% to almost 4.50% catching many by surprise. Nominal bond yields can be thought of as the interaction between: 1️⃣ Growth expectations 2️⃣ Inflation expectations 3️⃣ Term premium While it's straightforward to understand the impact that growth and inflation can have on bond yields, Term Premium is the most underrated driver of bond market pricing. Let's therefore answer 2 main questions. 1️⃣ What is Term Premium? An investor looking to get fixed income exposure can do that via buying 3-month T-Bills and rolling them each time they mature for the next 10 years. Alternatively, it can decide to purchase 10-year Treasuries today. What's the difference? Interest rate risk! Buying a 10-year bond today rather than rolling T-Bills for the next 10 years exposes investors to risks – term premium compensates for this risk. The lower the uncertainty about growth and inflation down the road, the lower the term premium and vice versa. Uncertainty is the key word here! The chart on the left proves the point very well: the higher the uncertainty (x-axis moving to the right) about future growth and inflation, the higher the term premium (y-axis moving upwards). And a higher term premium means higher bond yields! 2️⃣ What's happening to term premium today? The chart on the right shows that estimates of the US Term Premium have moved higher and they are now testing the upper side of recent ranges: in other words, there is some more uncertainty being priced in about the path ahead for growth and inflation. Investors are less confident about a future of predictably contained inflation and growth, and they expect some more volatility and uncertainty down the road. Taking a step back though, term premium remains still very depressed by historical standards: 10 years ago we were north of 1%, and today we are barely back to 0%. 🔴 The main takeaway here 🔴 The recent aggressive move higher in 30-year Treasury yields is NOT driven by fears of persistently higher inflation but instead by: - A positive re-rating of cyclical growth (2024 EPS estimates pushed higher) and some narrative-driven speculation for higher structural growth (e.g. AI effect on productivity); - Slightly higher term premium, reflecting investors’ expectation for more unpredictable boom and bust of growth and inflation down the road. Are you an institutional investor looking for more of this macro analysis? Ping me up on BBG to get access to my macro strategy and my live Bloomberg chat where I cover macro and markets daily!

Outside looking in, the current risk climate for high yield corporates exhibits numerous characteristics that echo the 18-24 months preceding the 2007-09 recession. Yield ratios (yellow line, lower visual in graphic below) are one such aspect, with yield-to-worst for the Bloomberg US Corporate High Yield Bond Index (white line, left axis) just 1.47x that for the Bloomberg US Corporate Bond Index (amber line, right axis). In practice, that owes to tight spreads and the elevated share of overall yield owing to risk-free rates, as well as the shape of the Treasury curve at present. Still, scant yield pick-up to trade down in quality and duration amid a softening macro and prospects for lower policy rates. Research: https://lnkd.in/emjnRUMd; BI STRT <GO> on the Bloomberg terminal for more data and research.

Day 21: Key Measures in Fixed-Income Analysis for Interest Rate Sensitivity In fixed-income analysis, investors and risk managers use several key measures to quantify a bond's or portfolio's sensitivity to changes in interest rates. These measures help understand the risk and behavior of fixed-income securities in response to interest rate fluctuations. 🏦 💲 🚀 1. Duration ⌛ ⏲️ Duration measures the sensitivity of a bond's price to changes in interest rates. It is expressed in years and represents the weighted average time to receive all cash flows (coupon and principal). Types of Duration: 1. Macaulay Duration:⌛ ⏲️ The weighted average time to receive cash flows. Useful for understanding a bond's time profile but less common in market risk analysis. 2. Modified Duration:⌛ ⏲️ Measures the percentage change in a bond's price for a 1% change in yield. Use Case: Assesses price sensitivity to small interest rate changes. 3. Effective Duration:⌛ ⏲️ Used for bonds with embedded options (e.g., callable bonds). Reflects price sensitivity to interest rate changes, accounting for option-like features. 2. Convexity 📊 ✈️ Convexity measures the curvature in the relationship between a bond's price and yield. It captures the second-order sensitivity of a bond's price to changes in interest rates. 3. Yield Measures Yield to Maturity (YTM): 🎢 🏦 The annualized rate of return earned if the bond is held to maturity. Helps in comparing bonds with different coupons and maturities. Current Yield: 🎢 🏦 Annual coupon payment divided by the current bond price. Yield Spread:🎢 🏦 The difference between the yields of two bonds is often used to measure credit or liquidity risk. Duration and convexity are foundational tools in fixed-income analysis. They provide insights into price sensitivity and help investors and risk managers assess and mitigate interest rate risk. By combining these metrics with other measures like PVBP and key rate duration, professionals can manage bond portfolios more effectively. Let me know if you'd like further calculations or examples! 💸 🗝️ 💲 #Quant #Finance #QuantitativeFinance #Derivatives #MarketRisk #RiskManagement #Trading #Risk #InterestRates #StressTesting

👉 𝐖𝐡𝐲 𝐝𝐨 𝐰𝐞 𝐩𝐞𝐫𝐟𝐨𝐫𝐦 𝐩𝐚𝐫𝐚𝐥𝐥𝐞𝐥 𝐚𝐧𝐝 𝐧𝐨𝐧-𝐩𝐚𝐫𝐚𝐥𝐥𝐞𝐥 𝐲𝐢𝐞𝐥𝐝 𝐜𝐮𝐫𝐯𝐞 𝐬𝐜𝐞𝐧𝐚𝐫𝐢𝐨𝐬 𝐟𝐨𝐫 𝐁𝐨𝐧𝐝 𝐏𝐫𝐢𝐜𝐢𝐧𝐠? Bond prices are extremely sensitive to interest rate movements, but in the real world, rates don’t shift uniformly across all maturities. That's why we run multiple scenarios, not just one. 🔹 Parallel Shift: Every point on the yield curve moves up or down by the same amount. This helps us test the overall interest rate sensitivity of the bond portfolio — especially duration and convexity effects. 🔹 Non-Parallel Shift: Here we model more realistic rate movements like: → Steepening (short-term rates fall, long-term rise) → Flattening (short-term rates rise, long-term fall) → Butterfly shifts (short and long rates rise/fall, mid rates stay) 👉 These help us evaluate curve risk — the risk that different segments of the curve move in different directions or magnitudes. 💡 Regulators and internal risk teams care deeply about these because in practice, market shocks are rarely parallel. 👉 By performing both types of scenarios, we gain a more holistic understanding of how sensitive our bond positions are to various interest rate environments — essential for managing market risk and pricing models effectively. 👉 If you're pricing fixed income products and not stress-testing for these scenarios, you're missing a huge piece of the puzzle. #QuantFinance #FixedIncome #InterestRates #YieldCurve #RiskManagement #BondPricing #MarketRisk #FinancialModeling #StressTesting #Duration #Convexity