4 risk factors could reset the yield curve

AP/Carolyn Kaster

• The Treasury yield curve can hint at what investors expect future rates and inflation to be.
• If US growth keeps up and the Fed tightens monetary policy, it's widely thought that yields on the front-end could rise more than those on the back this year.
• But other factors are at play — including inflation and long-run growth potential. 

The Treasury yield curve attracts a great amount of attention because of the important information embedded within it. Its shape can provide a (blurry) window into the outlook of investors: where they expect future rates and inflation to be and how much compensation they demand for uncertainty. If we further decompose expectations for real interest rates, inflation, and risk premium, we can also begin to understand the consensus view for future monetary policy. To that end, investors have historically viewed an inverted yield curve (i.e. weaker growth and inflation in the future, expected looser monetary policy and therefore lower rates going forward) as a leading indicator of recession.

For a Treasury curve trader, a view on Fed policy is crucial because monetary policy is a major driver of yield curve volatility. While longer-term rates are stickier and anchored by slow moving expectations of equilibrium, short-term rates are much more volatile and consequently drive the largest changes in the shape of the curve.See the rest of the story at Business Insider

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