March 28, 2023

Yields, Spreads, and Uncertainty/Risk

Term spreads increasing slighlty, yields (nominal, real) down, and risk measures up


One nominal rates have actually dived; real rates too, recommending the bulk of the motion is movement in perceived future financial activity.

Figure 1: Top panel: 10yr-3mo Treasury spread (blue), 10yr-2yr spread (tan), both in %; Middle panel: 5 year Treasury-TIPS spread (purple), 5 year spread changed for liquidity and threat premia (red); Bottom panel: VIX (sky blue, left scale), EPU (black, ideal scale). Source: Treasury via FRED, KWW following Damico, Kim and Wei (DKW), CBOE by means of FRED,
The five year yield dropped 46 bps today, while the two year dropped 27 bps. Real or small effects? Herere the corresponding 5 year small and real rates.

Figure 2: Five year Treasury yield (blue), TIPS (tan), both in %. Source: Treasury through FRED.
Over the recently, small 5 year rate has actually fallen 75 bps, while the TIPS yield has actually fallen 61 bps. This is suggestive of a real decline– which obviously could be driven by the outlook for the genuine economy, or by expectations of Fed policy tightness (see the previous post on the indicated course of the Fed funds rate)

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