Charting the Course: 3 Ways to Track the Yield Curve on thinkorswim®

You don’t need to be a hardcore Fed watcher or fundamental analysis expert to have at least a passing interest in the yield curve—that chart of government interest rates, from the overnight federal funds rate to the 30-year Treasury bond, and all points in between.   

Why, you ask? Interest rates—and the differentials between short-dated and long-dated ones—may give you a hint as to where the economy is headed. And closer to home, changes in the yield curve can affect your household balance sheet, from the interest you earn on your savings to the payments on your mortgage, to any floating-rate loans you might have.

In “normal” conditions, the yield curve chart is positive-sloping, with shorter-dated maturities yielding less than longer-dated ones (see figure 1). This higher interest rate for longer-dated securities compensates investors for higher risks—for example, over time, inflation can erode the real value of long-term bond payments.

Sometimes that curve flattens out or even turns negative-sloping. Many analysts point to an inverted yield curve as a sign of coming economic malaise because it could signal investors’ shift from stocks and other riskier investments to the relative safety of the U.S. bond market. 

Plus, the banking system relies on a positive-sloping yield curve. Banks pay interest on shorter-term deposits like checking accounts and CDs while collecting interest on mortgages, auto loans, and other long-term commitments. So an inverted yield curve puts pressure on the financial system. One of the lessons from the 2008 financial crisis is that pressure on the financial system can mean pressure on the economy.

So the yield curve—and changes between points on the curve—are worth keeping an eye on. There are at least three ways to track yield curve spreads on the thinkorswim^® platform.

Ready, set, follow that curve.

1. Economic Data Tab

If you’re a thinkorswim charting pro, you know charts typically go back 20 years or so. But under the Economic Data subtab there’s a veritable treasure trove of data—going back decades—thanks to the St. Louis Federal Reserve’s FRED database. Interest rates, foreign exchange, employment, price inflation, debt, education, productivity—you’ll find thousands of data points at the federal, regional, state, and local levels. And there’s a whole section on interest rate spreads. From the Analyze tab, go to Economic Data > Interest Rates > Interest Rate Spreads and pick one. For example, let’s look at the 10-Year Constant Maturity Minus 2-Year Treasury Constant Maturity (the venerable 2-year/10-year Treasury spread) shown in figure 2.

2. CME Interest Rate Futures Spreads 

Although the FRED database tracks each data point as far back as the Federal Reserve has been recording it, the data is typically aggregated weekly or monthly. Want to follow every tick? Futures markets are open virtually 24 hours per day from Sunday afternoon through each Friday’s close. CME Group lists futures contracts on short-, medium-, and long-term Treasury rates, and approved accounts can access them on the thinkorswim platform. 

One caveat, though: There’s a difference between interest rate contract prices and commensurate yields. Short-term contracts—federal funds rate, eurodollars, and the Secured Overnight Financing Rate (SOFR), for example—are quoted as 100 minus the reference rate (so 100 = 0% yield; 99 = 1% yield, and so forth). Treasury futures (2-year, 5-year, and 10-year notes; 30-year bonds) are quoted as a percentage of par value. Percentages are expressed in terms of bond points.

But each contract can be roughly normalized to another in terms of the dollar value of a one-basis-point change (“DV01”) by means of a predetermined hedge ratio. Figure 3 shows a few common hedge ratios and the formulas you can use to track the spreads on thinkorswim.    

Don’t sweat trying to calculate precise hedge ratios that produce a perfectly neutral DV01. It’s often impractical and expensive to maintain while the trade progresses. Most spread traders are satisfied if their trades are capturing 90% to 95% of the change in the curve, while the remainder is exposed to some directionality of interest rates. If the general slope and trend is what you’re after, these ratios can certainly do the trick.

3. Cboe Treasury Yield Indexes

Want something a little more straightforward, i.e., indexes that track yields directly? Cboe Global Markets tracks a few of them, and they’re available on thinkorswim.

• IRX tracks the 13-week Treasury bill yield
• FVX tracks the 5-year Treasury note yield
• TNX tracks the 10-year Treasury note yield
• TYX tracks the 30-year Treasury bond yield

These indexes are quoted as 10x the yield, so a reading of 10 would equate to a yield of 1.0%, a reading of 6.4 would equate to a yield of 0.64%, and so on. Once you’ve got that down, tracking the yield spreads becomes a matter of typing in a symbol, followed by a minus (-) sign, and then another symbol. So, what’s the yield spread between 5-year and 10-year Treasuries? It’s TNX-FVX (see figure 4). 

Although thinkorswim can help you monitor the yield curve, it can’t tell you where rates might be headed, nor how shifts in the yield curve might impact your portfolio. Just remember that, in general, if economic conditions are improving, the yield curve tends to steepen. If economic conditions are deteriorating, the yield curve tends to flatten or even turn negative. 

The Fed takes the yield curve into consideration as it makes rate decisions, and an inverted curve—should it occur—might not necessarily point toward an economic slowdown. And a curve that steepens too much or too quickly could indicate that inflation might be getting out of control.

With the yield curve—as with most things in life—moderation is the sweet spot.