This repo contains the U.S. Treasury Yield Spread project as part of my data science portfolio. The objective of this project is to visualize the U.S. Treasury Yield Spread chart using data downloaded from the U.S. Department of The Treasury website.
According to Investopedia, yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another. For example, if the two-year U.S. Treasury note is at 3% and the 10-year Treasury bond is at 5%, the yield spread between the two debt instruments is 2 percentage points, or 200 basis points. Typically, the higher risk a bond or asset class carries, the higher its yield spread. For example, a bond issued by a large, financially healthy company typically trades at a relatively low spread in relation to U.S. Treasuries. In contrast, bonds issued in emerging markets and developed markets, typically trades at a higher spread relative to U.S. Treasuries. Because bond yields are often changing, yield spreads are as well. The direction of the spread may increase or widen. When compared to the historical trend, yield spreads between U.S. Treasuries of different maturities may indicate how investors are viewing economic conditions. Widening spreads typically lead to a positive yield curve, indicating stable economic conditions in the future. Conversely, when falling spreads contract, worsening economic conditions may be coming, resulting in a flattening of the yield curve.
An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. An inverted yield curve is sometimes referred to as a negative yield curve. Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are demanded, sending the yields down. One of the most popular spreads to watch across Wall Street is that between the 2-year Treasury yield and the 10-year Treasury yield, i.e. "10yr-2yr" Yield Spread. Another increasingly popular spread is that between 3-month Treasury yield and the 10-year Treasury yield, i.e. "10yr-3mo" Yield Spread.
The U.S. Treasury yield curve rates data is available from the U.S. Department of The Treasury website. The 10yr-2yr yield spread chart is available from the Federal Reserve Economic Data (FRED) website. In this project, we will visualize the yield spread chart using data downloaded from the U.S. Department of The Treasury. We will plot both the 10yr-2yr and 10yr-3mo yield spreads charts.
Below is the 10yr-2yr yield spread chart at the FRED website:
The U.S. Treasury yield curve rates data is downloaded from the U.S. Department of The Treasury website. Currently, the data available is from the year 1990 to 2019. The Treasury series available are 1 mo, 2 mo, 3 mo, 6 mo, 1 yr, 2 yr, 3 yr, 5 yr, 7 yr, 10 yr, 20 yr, 30 yr, although the data is dependent upon the availability of the series. In this project, we will use the 3 mo, 2 yr and 10 yr series yield data.
In this project, we have visualized the U.S. Treasury Yield Spread chart for two yield spreads i.e. 10yr-3mo and 10yr-2yr. From the first chart, we can see that inverted yield curves have preceded three of the previous recessions in 1990-1991, 2001, 2007-2009. This shows that inverted yield curve is a strong predictor of economic recession and represents an accurate forecast of the turning points of the business cycle.
Recently, the yield curve has briefly inverted in March 2019 with the longer term 10-year treasury bond having a lower yield than shorter term 3-month treasury bill, causing a negative yield curve. Fortunately, the 10yr-2yr yield spread is still in the positive territory. However, given past historical trend, it can be argued that the next U.S. economic recession could be just 12-24 months ahead. When the U.S. sneezes, the world catches a cold. Could the world economy be facing another major economic downturn soon? Only time will tell.
If you have any feedback for this project, feel free to contact me via my LinkedIn or GitHub Pages.
