Swap rates suggest 0% interest rates in the States until 2015.
Article of the day link: let’s look at the swap curve.
Okay – so I wanted to look at the swap curve, but unfortunately the ISDAFIX® is hard to track down.
So I give you this:
Which is the US treasury curve (or yield curve), and shows the yields being offered on the different maturities* of IOU notes being issued by the US government.
The important thing to realise is that the interest rates/yields on the different maturities reflect the annual interest rates earned on those instruments.
Most people, when they see these graphs (myself included occasionally), assume “intuitively” that they make sense because you’ll earn more interest as time goes on: in other words, that the curve represents cumulative earned interest. And, well, you know, “compounding” or something.
Not true. The best way to look at this is to say: “if the economy were expected to remain unchanged and stable for the next 30 years, and it would never be a problem to sell the bond to someone if I needed some cash, what would this look like?”
And the answer is: it would be a straight flat line. Because no matter how long you were lending money for, you would expect to earn the same interest rate every year.
So what does the upward curve tell us?
It gives indication about two things:
- firstly, what people expect interest rates to do in the future (ie. they expect the interest rates to go up); and
- secondly, how easily people expect to be able to liquidate that loan by selling it to someone else (ie. longer maturing bonds have higher interest rates because you have to be rewarded/compensated for sacrificing the liquidity of just holding cash).
And if we look at the curve going out into the three year territory, we see it looking remarkably flat.
Conclusion: the market doesn’t expect anything to change for the next two/three years at least.
*A maturity is the length of time before the government repays you. So, for example, a 6 year bond means that the government will only pay you back for the money you lent them (by buying the bond from them) in 6 years time.