Yield Curve Shows PLENTY of liquidity
The Treasury publishes the daily yields for their securities. The yield curve is essentially a natural phenomenon that happens when yields slowly rise per annum as the length of the investment grows. The most important part about the current yield curve is that it shows one of the largest divergences between short and long term interest rates. The 1 month Treasury is yielding just 1/12 of the number stated per month, that’s .003% per month, AWFUL.
To make sense of the yield curve lets first take two different investment timeframes and work them out to find out the difference in total return on an investment of $100,000. We’ll use the 1 month and 2 year yields to determine how much more an investor would make by locking up their money for 2 years instead of reinvesting into one month securities over and over.
Using the December 2 yield of .04% per term an investor would have just $100,080 by investing in the 1 month Treasury month after month for two years. For the longer term investor with a time horizon of 2 years, the expected return would be a total of $101,800. The difference is huge, a total of $1720 meaning the short term yield is 21 times less than the longer term.
The extremely low short term rate shows how much liquidity is in the system and waiting on the sidelines for investment. Investors are so scared by this market that they have pushed the 1 month yield to record lows. The problem in the markets today is not a matter of liquidity, its that banks and large institutional investors are too afraid to invest in anything other than US backed Treasury bonds.
Watching the yield curve for the next few months should give us an idea of when the market should begin to turn around. The standard is that a divergence of less than 2% between the 20 year and 3 month note is a sign of a market, and economic turnaround. We should be asking the question though, who’s hoarding all of this money and when will it be coming back. Obviously money is cheap and plentiful and its only a matter of time before it finds its way back into the global markets including both equities and commodities.
