Assignment for Fixed Income: We are going to examine the behavior of the Treasury Yield Curve and in particular the ten-year and the two-year notes. We will also examine the difference between these...

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Assignment for Fixed Income: We are going to examine the behavior of the Treasury Yield Curve and in particular the ten-year and the two-year notes. We will also examine the difference between these two rates. It is conjectured that if the Yield Curve “inverts” or when the yields the two-year Treasury note approach the level of yield on the ten-year note, then the market is “signaling,“ a possible future recession. Stated differently, when the difference between the ten-year and two-year Treasury rates goes to zero (or negative), then the market appears to “signal” a possible future recession (two-consecutive quarters of negative GDP growth). For this assignment you will go to the Treasury website and pull off some data and examine the difference between the ten-year and two-year Treasury rates to see when they go to zero (negative) and what that may mean for the stock market. Steps: 1.) Go to the Website: www.treasury.gov/resource-center/data-chart-center/interest-rates 2.) Click on: Daily Treasury Yield Curve Rates 3.) Go to: Select type of Interest Rate Data 4.) Scroll down to: Historic Treasury Rates Chart (hit GO) 5.) Now you will have to allow Adobe to run on your system. 6.) Now in the Choose Date Range specify the following ranges: Below are the recessions for the U.S. market. We will look at the three most recent recessions to examine the behavior of the U.S. yield curve as well as the most current behavior of the yield curve in 2019. Recession Date of Recession Length Rate GDP Explanation Early 1990s recession in the United States July 1990- Mar 1991 8 months 7 years 8 months 7.8% (June 1992) −1.4% After the lengthy peacetime expansion of the 1980s, inflation began to increase and the Federal Reserve responded by raising interest rates from 1986 to 1989. This weakened but did not stop growth, but some combination of the subsequent 1990 oil price shock, the debt accumulation of the 1980s, and growing consumer pessimism combined with the weakened economy to produce a brief recession.[64][65][66] http://www.treasury.gov/resource-center/data-chart-center/interest-rates https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://en.wikipedia.org/wiki/Early_1990s_recession_in_the_United_States https://en.wikipedia.org/wiki/Early_1990s_recession_in_the_United_States https://en.wikipedia.org/wiki/Early_1990s_recession_in_the_United_States https://en.wikipedia.org/wiki/Early_1990s_recession_in_the_United_States https://en.wikipedia.org/wiki/1990_oil_price_shock https://en.wikipedia.org/wiki/1990_oil_price_shock https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-68 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-69 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-70 Early 2000s recession Mar 2001- Nov 2001 8 months 10 years 6.3% (June 2003) −0.3% The 1990s were the longest period of growth in American history. The collapse of the speculative dot-com bubble, a fall in business outlays and investments, and the September 11th attacks,[67] brought the decade of growth to an end. Despite these major shocks, the recession was brief and shallow.[68] Great Recession Dec 2007- June 2009[69][70] 1 year 6 months 6 years 1 month 10.0% (October 2009)[71] −5.1%[72] The subprime mortgage crisis led to the collapse of the United States housing bubble. Falling housing-related assets contributed to a global financial crisis, even as oil and food prices soared. The crisis led to the failure or collapse of many of the United States' largest financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Citi Bank and AIG, as well as a crisis in the automobile industry. The government responded with an unprecedented $700 billion bank bailout and $787 billion fiscal stimulus package. The National Bureau of Economic Research declared the end of this recession over a year after the end date.[73] The Dow Jones Industrial Average (Dow) finally reached its lowest point on March 9, 2009.[74] https://en.wikipedia.org/wiki/Early_2000s_recession https://en.wikipedia.org/wiki/Early_2000s_recession https://en.wikipedia.org/wiki/Dot-com_bubble https://en.wikipedia.org/wiki/Dot-com_bubble https://en.wikipedia.org/wiki/Economic_effects_arising_from_the_September_11_attacks https://en.wikipedia.org/wiki/Economic_effects_arising_from_the_September_11_attacks https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-NBER_Nov_01-71 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-72 https://en.wikipedia.org/wiki/Great_Recession https://en.wikipedia.org/wiki/Great_Recession https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-73 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-74 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-75 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-76 https://en.wikipedia.org/wiki/Subprime_mortgage_crisis https://en.wikipedia.org/wiki/United_States_housing_bubble https://en.wikipedia.org/wiki/United_States_housing_bubble https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010 https://en.wikipedia.org/wiki/Bear_Stearns https://en.wikipedia.org/wiki/Fannie_Mae https://en.wikipedia.org/wiki/Freddie_Mac https://en.wikipedia.org/wiki/Lehman_Brothers https://en.wikipedia.org/wiki/Lehman_Brothers https://en.wikipedia.org/wiki/American_International_Group https://en.wikipedia.org/wiki/Automotive_industry_crisis_of_2008%E2%80%932009 https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program https://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 https://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009 https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-77 https://en.wikipedia.org/wiki/File:DJIA_historical_graph_to_jan09_(log).svg https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#cite_note-Stark-78 Post Great Recession January 2019 to October 2019 Recession? +3.6% The stock market fully recovered from its historic lows of 2008 and the Treasury markets have offered positive yields on short-term debt (unlike the European and Japanese markets). But dark clouds overhang the U.S. economy with further interest rate cuts on the table and trade wars continuing. The question is whether what signal the bond market is projecting for the U.S. economy? 1.) Type in the date ranges from January to December for the following years: 1990, 2000 to 2001, 2007, and 2019. What is the behavior for the difference in the 10-year and two-year Treasury rates? What does a negative 10-year minus two-year rate indicate? 2.) Go back to the website and also enter in the date range from 1998 to 1999 (again January to December). Is the difference in rates zero? If so, did the “inversion” predict a recession? 3.) Go back to the Website and type in the date range 2005 to 2006. Did the yield curve predict a U.S. recession in 2006? Did a U.S. recession occur in 2005 or 2006? 4.) Go back and investigate the yield curve for 2019. Did the term structure invert during 2019? Do you think the U.S. will go into recession in 2020? Why or why not? https://en.wikipedia.org/wiki/Great_Recession https://en.wikipedia.org/wiki/Great_Recession
Answered Same DayNov 02, 2021

Answer To: Assignment for Fixed Income: We are going to examine the behavior of the Treasury Yield Curve and in...

Soma answered on Nov 03 2021
138 Votes
#1)
The charts for the historical treasury rates for the given dates are shown below:
1990 Jan- 1990 D
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https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx
The above chart 2-year treasury notes approach to 10 years notes in 1990. In other words, the difference between the 10 years treasury notes and 2 years treasury notes has come down to zero till July. Since July 1990, the difference in the 10 years and 2-year treasury notes becomes positive.
2000 Jan – 2001 December
The difference between 10 years treasury notes and 2 years treasury notes has gradually narrowed down and come down to zero in Jan 1991. This is a clear signal of future recession.
2007 Jan – 2007 Dec
In 2007, the yield from two-year treasury note approaches towards 10-year treasury note and merge in March 2007. Th difference between the two remains zero for a substantial period of time till June 2007. As the difference becomes zero, market gives a reliable signal of future...
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