A PERSPECTIVE ON HOW 30-YEAR MUNIS CAME TO BE PAYING 900% MORE THAN THE 1-YEAR.

GIVING THE YIELD CURVE
A NEW SLANT.

WHICH IS THE STEEPER CURVE?

PROBLEM:

Comparing one yield curve to another is difficult when curves start with 1-year maturities at disparate interest rates.

SOLUTION:

1. Divide yields of 5, 10, 15 and 20 year maturities by 1-year yield and convert to ratios of long over short.

2. Start the 1-year maturity of each index side by side on a common base line.

3. With the 1-yr maturity of each index starting on the common base line, plot the ratios of each longer maturity to the 1-yr maturity

LONG TO SHORT YIELD RATIOS

You can now compare disparate yield curves graphically by the ratios of long over short, at any moment in time, or each to itself over time.

INTERPRETATION:

I’d sooner take the credit risk of 1.94% in a 1-year Baa than market risk of 1.51%, 1.67%, 2.24% in 5-year Aaa, AA, and A respectively.

What do you think? Leave a comment by filling in the form below:

* - required fields