Bond yields and the yield curve
The yield on US Treasuries sums up the market's rate, growth and inflation expectations in a single number. Plotting the yields of different maturities side by side gives the yield curve. Yields can affect many markets, crypto included, through the dollar and risk appetite.
What is a bond yield?
The US Treasury borrows by issuing bills, notes and bonds of different maturities. A bond's yield is the annual return someone would earn by buying it at today's price and holding it to maturity. The most watched are the 2-year and 10-year Treasury yields.
Price and yield move in opposite directions. The coupon a bond pays is fixed; when the bond's price falls, the same coupon is earned on a lower price and the yield rises. When the price rises, the yield falls. That is why "bonds selling off" and "yields rising" describe the same move.
What the maturities reflect
- 2-year yield: the maturity most sensitive to expectations of where the Fed will take its policy rate in the coming period.
- 10-year yield: reflects long-term growth and inflation expectations, plus the extra return asked for lending over a long period. A benchmark for many borrowing rates.
- Treasury auctions: the Treasury sells new debt at regular auctions. Weak or strong demand can move yields around the auction time.
The yield curve and inversion
The yield curve plots the yields of different maturities side by side at the same moment. Normally longer maturities pay more and the curve slopes upwards. When short-term yields rise above long-term ones, the curve counts as inverted.
The most watched measure is the gap between the 10-year and the 2-year yield (2s10s). This gap turning negative has come before several US recessions in the past. But the time in between has varied widely; an inverted curve is a warning sign, not a timing tool.
The yields quoted in headlines are nominal. Taking expected inflation away from them gives the real yield. How real yields relate to the dollar and gold is covered on a separate page.
How yields can affect risk assets
The link between yields and risk assets is not constant. The cards below are common tendencies; why yields move matters as much as which way.
Yields rising on tighter expectations
The risk-free return rises, financial conditions tighten and the dollar can strengthen. This can weigh on risk assets such as equities and crypto.
Yields falling on easing expectations
Yields falling on expected Fed rate cuts can be read as a friendlier backdrop for risk assets.
Moves driven by growth or fear
Yields rising on strong growth can rise together with risk assets. Yields falling in a rush to safety can come alongside falling risk assets.
What it shows, what it does not prove
What it shows
- The market's combined rate, growth and inflation expectations at that moment
- Whether the gap between short and long maturities is widening or narrowing
- Whether financial conditions are tightening or easing
What it does not prove
- When a recession will follow an inverted curve, or that one will follow at all
- That crypto or equities will fall when yields rise
- That a move in yields has a single cause
The MarketLevelMap view
How it relates to zones
A sharp move in yields can come with a test of a support or resistance zone in crypto. It does not change whether the zone is valid; it describes the context in which price reached the zone.
A test under pressure from yields and a test in a calm backdrop can be read differently. Even so, what decides is reading the zone as a band and judging it by 1H, 4H or daily closes; the macro picture adds context to that reading.
Often confused with
- Real rates and the dollarThe nominal yield is the headline figure; the real yield is what is left after taking expected inflation away.
- Fed rate decisions (FOMC)The Fed sets the policy rate; the market sets Treasury yields. The 2-year yield tracks Fed expectations closely, but they are not the same thing.
For general information only. Not investment advice.Last updated: