Wed 2 Aug 2006
We spend a good amount of time discussing interest rates, but there are a few different ways to look at them…
One way is the yeild curve. It looks at the current rates across many maturities right now, and many people are watching it to see if/how much it becomes inverted. There is even a web page that will calculate the probability of a recession based on the Federal Reserve’s research. (Current answer: 35%) And, of course, there’s the animated version of the yield curve.
We can also look at the yield spread ($TYX:$IRX) which compares the 30 year rate treasury bond rate and the 3 month treasury bill rate over time. (You can use the 1 month yeild ($UST1M), 1 year ($UST1Y) 5 year ($FVX), 10 year ($TNX), 30 year ($TYX), or any other yield you might want.)
As long as the line is dropping, liquidity is contracting. The line should start to rise when the FOMC starts trying to ease again, or if 30 year rates were to shoot up (bond prices would fall). This would indicate that liquidity was expanding.
We can attach a simple moving average to the chart (which StockCharts does automatically) to try and identify when a trend change is underway. This is one of the charts I regularly review to keep the concept in my mind that we haven’t seen the spreads start to widen yet.