Navigating the Dynamics of 10-Year Treasury Yield and Economic Indicators:
An Interactive Exploration
In a world where fluctuation of numbers and rates gauged the pulse of the economy, the dynamics of the 10-Year Treasury Yield stand out as a critical barometer of economic health and investor sentiment.
But what if the seemingly arcane interplay between GDP growth, and inflation rates could unlock the secrets to predicting treasury yields and crafting savvy investment strategies?
Join us on a journey that transforms complex economic data into a captivating narrative, where each trend line tells a story of opportunity, risk, and the relentless quest.
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Treasury Bond
The U.S. 10-Year Bond is a debt obligation note by The United States Treasury.
The yield on a Treasury bill represents the return an investor will receive by holding the bond to maturity.
Investing resources into a 10 year treasury note is often considered favorable
due to federal government securities being exempt from state and local income tax.
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United States 10-Year Bond Yield
Inflation Expectations: Think of inflation like the rate at which money loses its value over time. In 2020, people expected money to hold its value better than usual because everyone was spending less.
When people think their money will stay valuable, they like investing in government bonds, which pay back with interest over time. Because so many people wanted these bonds, their yields (or the interest you earn from them) went down.
Economic Activity (GDP): The economy took a big hit in 2020 due to the pandemic. Businesses closed, and many people stopped buying things, leading to a drop in the country's total production and services.
During such times, people prefer putting their money into something safe, like government bonds, rather than riskier investments. This rush to buy bonds made their yields lower, as there was less need for the government to offer high interest to attract buyers.
Inflation Expectations: By 2023, people started to notice prices going up faster than before, which means the money in your pocket doesn't go as far as it used to. This happens when the economy gets too hot, and there's too much money chasing too few goods.
When people expect prices to keep rising, they're less keen on bonds that pay fixed interest because the money they get back in the future won't buy as much. So, to attract buyers, the interest rates or yields on these bonds need to go up.
Economic Activity (GDP): The economy bounced back strongly in 2023 after the tough times caused by the pandemic. Businesses reopened, people went back to work, and spending increased. This recovery is good news, but it can also lead to too much money flowing in the economy, contributing to higher inflation.
To keep things in balance and ensure the economy doesn't overheat, interest rates on government bonds were raised. This means if you're buying bonds, you can expect to earn more interest than before, reflecting the higher yields seen during this period.
What is GDP?
Gross Domestic Product (GDP) is a crucial economic indicator that measures the total value of all goods and services produced within a country over a specific period, typically a quarter or a year.
In the context of this project, GDP serves as a fundamental economic indicator that can significantly influence the dynamics of the 10-Year Treasury Yield. Changes in GDP growth rates can lead to adjustments in monetary policy, which in turn can affect interest rates and thus the Treasury yields.
Question: What is included in GDP?
Incorrect. The correct answers are A (Cars), B (Clothes), C (A Haircut), and D (A Doctor's Care).
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GDP Overview from 2000 to 2023
Note: GDP in chained 2017 dollars adjusts for inflation, providing a more accurate measure of real economic growth. The base year of 2017 is used to reflect the economy's structure and prices in a relatively recent period.
Real GDP Growth Rate Overview from 2000 to 2023
What is Inflation?
Inflation, the rise in prices over time, is managed by central banks to ensure economic stability, commonly measured by the Consumer Price Index (CPI), which tracks the price changes of a standard set of goods and services.
Inflation reduces the real return on investments like Treasury bonds, leading investors to seek higher yields as compensation for expected purchasing power declines. Central banks adjust monetary policies to manage inflation, affecting interest rates and consequently Treasury yields.
Check your understanding
Question: Which of the following best explains why the consumer price index (CPI) may not accurately measure changes in the cost of living?
Incorrect. The correct answers is B (When prices of some goods go up, consumers buy less of those and more of goods that are cheaper).
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Year to Year U.S. Consumer Price Index (CPI)
CPI 12-Month Percent Change
This line graph displays the trend of percentage change of consumer price index in each month from 2000 to 2024. We may observe from the line graph that the trend before 2008 did not fluctate greatly day to day.
However, in the midst of 2008, commodity prices experienced a significant downturn, coinciding with the onset of the global financial crisis in September of that year. Initially, the decrease in overall economic activity was moderate, but it rapidly intensified during the autumn of 2008, reaching a critical point as financial market pressures peaked.
In December 2008, the Consumer Price Index for All Urban Consumers (CPI-U) showed a 0.7 percent decline on a seasonally adjusted basis, marking the third consecutive month of decrease. This drop was mainly driven by lower energy prices, particularly for gasoline, with the energy index falling by 8.3 percent in December.
It is worth to notice the post-pandemic recovery. When vaccinations became available, the trend in CPI shows a significant increase. This upward trend persists throughout 2021 and into early 2022, with the CPI steadily rising from 1.4% in January 2021 to 9.1% in June 2022.
From June 2022 until 2024, the trend in the Consumer Price Index (CPI) appears to continue with a relatively stable or gradually increasing trajectory.
The End
Data Source: World Bank Open Data