Let’s See How US Treasuries are Reacting to China’s Tighter Rates

Here’s an update on Treasury yields in advance of the first business day after the People’s Bank of China (NYSE:FXI) boosted its key one-year lending and deposit rates by 25 basis points on Christmas day.

The behavior of Treasuries is an area of special interest in light of the Fed’s QE2 strategy. The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.
Treasury Yield Snapshot

The yield spread has been widening over the past couple of months. However, the pattern of rising yields at the short end runs counter to the expectations of a Federal Reserve that has set the Target Rate to 0.00 – 0.25. The next chart shows the 2- and 10-year yields with the 2-10 spread highlighted in the background.
Treasuries Spread Since 2007

The final chart is an overlay of the CBOE Interest Rate 10-Year Treasury Note (TNX) and the S&P 500.

Treasury Yield Snapshot

Doug Short Ph.d is the author of dshort.com.

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