Introduction to the treasury yield curve. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Both corporations and governments can borrow money by selling bonds. This tutorial explains how this works and how bond prices relate to interest rates. In general, understanding this not only helps you with your own investing, but gives you a lens on the entire global economy.
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The reason why short term yields rise above long term yields (which logically shouldnt happen in a good economy) is because bond investors bid up long term T-notes and bonds (10-30 years) in anticipation of the Fed (central banks) lowering interest rates and thereby raising prices, which current bond holders gain on. So it is anticipation of Fed action in response to a bad economy that the yield curve inverts.
Short-term rates are rising to the point that they are nearing the yield of long-term rates. This is a bad sign because banks are gaining less interest (banks receive interest on long-term loans and pay interest on short-term loans), AKA their net interest margin. A flattening, and eventually, inverted yield curve has predicted the last 7 recessions.
Josef , I understand how hyperinflation works. printing may be the only option the fed has, especially at the end of our massive debt cycle. thus there bond is guaranteed but the value of the dollar might be less by the time your loan is paid. so raising taxes is not the only way to pay back a loan. a bond is only secure if the dollar is on the gold standard.
I would like to address a question regarding the relation between the demand on bonds and the interest rates. Why does the interest rates go lower when you have more demand? Does it have something to do with the fact that if more people have the T-bill/note/bond the government will have more expenses with the higher interest rate?
hey Khan you should make videos for the CFA
JUST FOR ME :) I literally am banging my head on my keyboard to try and get the information in. The books are BORING. I am rereading each paragraph like 5 times. It just is not sinking in.
Where do you teach? Wow! I have been in my text for hours trying to make sense of this (currently taking Financial Inst and Society), and it's been difficult to understand in simple terms. Thank you, you have great communication skills an absoultely marvelous voice! Thank you so much!
Why would the two year rate be greater than the one year rate?
There are two basic reasons:
1. If inflation is expected to be higher—the expectations hypothesis
2. If investors prefer short-run investment horizons and need to be enticed (with higher rates) to buy longer maturities—the maturity preference hypothesis.
The only worrying thing is that previous bonds paid off are being financed with new bonds issued . Not good for treasury's credit rating, and it won't be too long before foreign buyers of govenment bonds wise up.
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