The Yield Spectrum

In general, the higher quality the debt, the lower the yield.  Also, the same applies to maturity for non-callable or prepayable debt.   The longer the maturity, the higher the yield.  This is normal because longer debts are less certain, aside from well-financed governments.

So when the Fed tries to twist the yield curve it is no surprise that that the Treasury curve twists (for now) and the stock market panics.  The Treasury yield anticipates future purchases.  The stock market looks at the recklessness of the Fed, and prices stocks lower.  Prices Yields on low quality bonds go lower as a result.

The Fed is making a lot of noise, but does little for the economy as a whole.  The low interest rates it offers is only valuable to companies that don’t need help — high quality, those that have no difficulty borrowing.  The rich get richer, and the poor get poorer.  That is Fed policy, for now.


Thanks to wsm for the correction on my piece.  I meant to say prices, not yields, in the last sentence of the middle paragraph.


  • wsm says:

    “Yields on low quality bonds go lower as a result.”

    What??? It looks to me like low-quality bond yields have RISEN as a result, not fallen. I am using JNK as my proxy, but countless other low-quality bond indexes show the same rise in yields over the past few days.

    “The Fed is making a lot of noise, but does little for the economy as a whole.”

    That is fair enough. But isn’t it pretty obvious that the problems in the economy are of the fiscal and regulatory kind, not monetary? Therefore, what would you have the Fed do differently at this juncture? (not what do you wish they did at XYZ point in the past, but what is their best course of action RIGHT NOW, and why?)

  • RedSt8r says:

    Given that Fed policy failed in the 1930’s and that similar policies have been failing for two decades in Japan and have failed in other nations and times as well perhaps it is time for counter-intuitive responses. Namely, allow or push the Fed funds rate to a more normal level. Allow or push the 10 year Tnote rate to a more normal 6%. Allow the 50 million seniors, retirees, near retirees and pre-retirees to earn a decent return on their savings. Seniors are in fact big spenders at least as much as the poor and working class. A better return would give seniors more confidence in their personal monetary future as well as push potentially hundreds of billions of dollars into the private economy. Who would be hurt? Borrowers. It is time to stop running the economy on the basis of helping or saving borrowers and time to start allowing savers and small investors to earn a decent return. It is not likely to be any worse than what we’ve had and has potential to be a lot better.

  • Dave_G says:

    Hi David,

    Sorry to disagree, but I think the markets are interpreting the Fed’s Operation Twist a bit differently.

    Take a look at the latest Public Opinion Strategies report at It is really obvious that sentiment is negative, and markets are just looking for an excuse to sell.

    Beyond that, the risk from Europe, the lack of much prospects for future growth… I went to 50% cash and a big bet on BOM (ultra short industrial metals) about 2 months ago. It’s paid off pretty well.