Thesis
The aim of this study is to analyze the yield curve of US Treasury securities, using the ratio between 2-year maturity (T02Y) and 10-year maturity (T10Y).
Development
First, a graph was created to display the spread between the two maturities, specifically 02Y/10Y. Secondly, some fundamental references to monetary policy were included, such as QE (four times since the Lehman Brothers’ failure) with concurrent intervention on interest rates.
The emerging data (Figure 1) lead to the following conclusions:
- The rapid interest rates rise due to excessive US inflation inevitably led to the selling of treasury securities in the portfolio to purchase new high-yield issuances;
- As often happens in these cases, there has been an inversion of the yield curve, with short-term securities offering a higher premium compared to longer-term ones. This phenomenon often foreshadows an impending recession, sometimes only technical;
- The end of Q4 with the interest rate hike in March 2022 had been widely anticipated by the market, with the inversion starting approximately 9 months prior;
- As of today, the spread between short-term and long-term securities has reached a level not seen in over 40 years.
Conclusion
We are experiencing an exceptional historical period, partially reminiscent of the US inflation crisis of 1965-82, but with the novelty of over 10 years of QE and negative interest rates, and a federal debt never so high. Furthermore, for the time being, a recession has not followed.
2024 is expected to be a year of stability in the rise of interest rates and a return to inflation normality. It will be interesting to observe whether the monetary policies formulated by the FED will achieve their objective, confirming the validity of the ultra-expansive economic theories developed in the last 40 years (since the abandonment of the Bretton Woods system). If the FED were to fail, the greatest danger would indeed be an unprecedented debt crisis (Figures 2 and 3), undermining the credibility of the dollar as the world’s primary reserve currency.
Please note that the information provided is not financial advice. It’s important to conduct thorough research and consider consulting with a financial professional before making any investment decisions.
