Upward-sloping, flat, or negative? The yield curve is tracked by traders and investors as an economic and inflation barometer. Here are three ways to track yield curve spreads on the thinkorswim® platform.
You don’t need to be a hardcore Fed watcher or fundamental analysis bean counter to have at least a passing interest in the yield curve—that chart of government interest rates, from the overnight Fed 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—can 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 bonds 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, as 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—is worth keeping an eye on. There are at least three ways to track yield curve spreads on the thinkorswim platform from TD Ameritrade.
Ready, set, follow that curve!
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. Under the Analyze tab, go to Economic Data > 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). See figure 2.
Although the FRED database tracks each data point as far back as the Fed has been recording it, the data is typically aggregated weekly or monthly. Want to follow every tick? Futures markets are open virtually 24 hours a 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—Fed funds, 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, rather than in basis 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 of the 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 rest 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.
Want something a little more straightforward, i.e., indices that track yields directly? Cboe Global Markets tracks a few of them, and they’re available on thinkorswim.
These indices 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.
Find your best fit.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.