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Marketplace Morning Report

A guided tour of the yield curve

Justin Ho Aug 15, 2019
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Traders work before the closing bell at the New York Stock Exchange where the Dow Jones Industrial Average dropped 800 points after talk of an inverted yield curve on August 14, 2019 in New York City.
Johannes Eisele/AFP/Getty Images

Markets spent yesterday in a tizzy because the yield on 10-year government bonds dipped below the yield on 2-year government bonds. President Trump called it a “crazy inverted yield curve” — a point that’s not altogether wrong, because bonds aren’t supposed to work like that. But the concern might be overblown.

The yield curve inversion also highlights the fact that investors buy different types of government bonds for different reasons.

The government borrows money by selling more than a dozen different kinds of bonds with maturities as short as four weeks and as long as 30 years. Normally, longer-term bonds pay higher interest than shorter-term bonds. But short-term bonds have advantages, too.

Jeffrey Cleveland, chief economist at Payden and Rygel, said a short-term bond, like a one-year treasury bill, might appeal to a company that needs to store cash it can access quickly.

“It’s effectively a savings account,” he said.

Medium-term treasury notes, like 3- or 7-year notes, might appeal to investors who want to include safe government bonds in an investing portfolio, and earn some interest.

“That includes most banks, includes a lot of insurance companies, and consumer-style investors that are investing through mutual funds,” said Jim Vogel, interest rate strategist at FTN Financial.

Longer bonds — 10- to 30-year bonds — appeal to big pension funds, insurance companies and university endowments, which don’t mind locking up their money for so long.

But Vogel said investors also buy and trade 10- and 30-year bonds when other assets, like stocks, start deteriorating in value. Investors often crowd into the safe haven of government bonds when markets get volatile.

Putri Pascualy, managing director at investment firm PAAMCO Prisma, said that’s one of the reasons investors pay such close attention to the 10-year treasury note.

“It is the most actively traded segment in the bond market,” she said.

Just another reason Marketplace quotes the 10-year Treasury note every day when we “do the numbers.”

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