Theory  |  JUN 2006

Playing The Yield Curve by Jay Kaeppel

Stocks & Commodities V. 24:6 (32-36): Playing The Yield Curve by Jay Kaeppel So what is the yield curve, and how can you use it in your trading? Find out here. Most investors are at least vaguely aware of something known in financial circles as the “yield curve.” In its most basic definition, the yield curve represents the difference between interest rates offered by US Treasury securities of various lengths of time until maturity. A more complex version of the yield curve compares intermediate-term interest rates to short-term rates and long-term rates to both intermediate- and short-term rates. Still, the most useful piece of information to find from the yield curve is how short-term rates compare to long-term ones, as these two values represent the two polar extremes on the yield curve. So for the purposes of this article, we will define the yield curve as the difference between long-term and short-term interest rates. The simplest way to analyze the yield curve is to subtract the yield on 13-week T-bills from the yield on long-term Treasuries. This can be done using the ticker symbols $TYX and $IRX. $TYX represents the latest yield on long-term (30-year) Treasury bonds, while $IRX represents the latest yield on 13-week Treasury bills. These two yields are plotted against one another in Figure 1. Figure 2 displays the yield curve itself since 1993, which is calculated by simply subtracting the daily IRX values from the daily TYX values.

by Jay Kaeppel