Term Structure of Interest Rates Analysis

DETERMINANTS OF INTEREST RATES FOR INDIVIDUAL SECURITIES Theoretically there are 5 factors that affect the interest rates. They are inflation rate, real interest rate, default risk, liquidity risk and term to maturity. Their relationship with yield rates is as follows Relationship Explanation Inflation rate Direct Greater the inflation, greater the desired yield Real interest rate Direct Greater the real interest, greater the desired yield Default Direct Higher the default risk higher the desired yield Liquidity Risk Direct Higher the liquidity risk higher the desired yield Term to maturity Direct Higher the term to maturity higher the desired yield Practically the yield curve can thus take any shape depending on government policy, expectation, economic situation, foreign participation and various other factors. Factor

An analysis of the term structure for India and USA starting from 2008 is given below: -

INDIA
2008
13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 15YR 20YR

1-Jan-08 2-Apr-08 1-Jul-08 1-Oct-08

Details CRR Rate Repo Rate Reverse Repo Rate Inflation Rate Oil Prices (USD/ Barrel)

January 08 7.50 7.75 5.00 5.51 92.83

April 08 7.75 7.75 5.00 7.81 112.46

July 08 8.75 9.00 5.00 8.33 133.48

October 08 6.00 8.00 5.00 10.45 76.72

Explanation: Except of the July quarter, all the other 3 quarters are flattish. This is because there was an anticipation of stable future rates.As per the expectations theory, we can also say that the global inflation was expected rise in the short term and fall in the long term. As we can see, the inflation rate as well as the oil prices has been rising from January to July. In July 08, in order to curb growing inflation from 5.51% in January to 8.33% in July, RBI had to take tight monetary policy and thus increased CRR rates to as high as 8.75%.This graph also indicates a recession / slowdown in the near future as the short term rates are higher than the long term rates. i.e. there is an expectation that the rates will fall down in the future.Many participants felt that the economy was weakening and thus a higher short term rate and lower long term rates are seen. (This was followed by the global economic slowdown). Because of global economic slowdown, there was a liquidity crunch in the Indian Markets as ECB flows had slowed down and FII flows were negative during this period; hence it was expected that the RBI would aggressively cut interest rate in near future. This could be seen in the CRR cut of 2.75% and Repo Rate of 1%.

2009
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 15YR 20YR 1-Jan-09 1-Apr-09 1-Jun-09 1-Oct-09

Details CRR Rate Repo Rate Reverse Repo Rate Inflation Rate Oil Prices (USD/ Barrel)

January 09 5.00 5.50 4.00 10.45 41.92

April 09 5.00 4.75 3.25 8.70 50.89

July 09 5.00 4.75 3.25 11.89 64.29

October 09 5.00 4.75 3.25 11.49 75.82

Explanation: The effects of the global slowdown on the Indian economy can be seen through this chart, as India was facing a liquidity crunch and thus short term interest rates are reducing. From October, 2008 to January 2009,there was a huge cut in interest rates by the RBI due to above reasons. We can see that the CRR ratesare cut down from 6% to 5% and the Repo Rate from 8% to a mere 5.50%. In Jun 09, we can see that there was an expectation of further weakening of the economy, which can be seen through low short term rates. However, long term rates are based on risk premium and growth potential of the economy and thus Long Term rates for the Indian economy are high. Since, the long term interest rates are high, it indicates that the slowdown and inflationary pressures area temporaryphenomenon and this would not affect India s growth in long run. Though the inflation was in double digit in this period, RBI did not raise rates since the inflation was primarily due to the drought which led to high food inflation. Also the rising oil prices which was seen a recovering after the global slowdown added to the inflationary pressure. Thus this policy measure followed by RBI shows that the Indian policymakers were routing for growth of the Indian economy and wanted to keep interest rate lower. However, it can be seen from the long term interest rate that inflation in India would rise further along with growth and interest rates would be raised by RBI in the near future.

2010
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 15YR 20YR 1-Jan-10 5-Apr-10 1-Jul-10 1-Oct-10

Details CRR Rate Repo Rate Reverse Repo Rate Inflation Rate Oil Prices (USD/ Barrel)

January 10 5.00 4.75 3.50 16.22 77.70

April 10 5.50 5.25 3.75 13.33 84.58

July 10 5.50 5.25 3.75 11.25 76.53

October 10 5.50 5.25 3.75 9.70 81.97

Explanation: Even though inflation was as high as 16.22% in January, the RBI was reluctant to implement a tight monetary policy, as the inflation was mainly due to food inflation and growth concerns due to global slowdownwhich was considered a temporary phenomenon and thus, the rates were expected to fall gradually over the short term. Even though inflation rates did not come down drastically, we can see that the short term rates have been rising. This indicates that there was an expectation that the RBI would raise the interest rates, to tame double digit inflation which can be seen as the Repo Rates were raised from 4.75% to 5.25%. Also, due to the global economic recovery and loose monetary policy measure adopted by developed economies (QE2), we saw that a lot of FII s started reinvesting in the stock markets of emerging economies. (India being the major beneficiary of this loose monetary policy) Except for the October Yield curve which is flattish all the other yield curve shows a rising trend showing that it is very important that India manages its inflation expectations carefully. Also, due to structural change and political instability in India, the foreign investors would not take time to pull out and the Indian economy would be left with another liquidity crunch.

USA
2007

Jan-07
5.2 5.1 5 4.9 4.8 4.7 4.6 4.5 4.4 1 month 3 months6 months 1 year 2 year 3 year 5 year 7 year 10 year 20 year 30 year

Short Term interest rates are slightly higher than the long term rates. This is was due to high inflation rates. Also the Federal Bank was expected to tighten the monetary policy in 3-6months time period. The structure of graph shows uncertainty in two or three year period. As you can see that long term interest rates are lower, a slowdown and rate cut in medium term can be expected.Also Dow Jones was trading at high levels

Feb-07
5.2 5.1 5 4.9 4.8 4.7 4.6 1 month 3 months6 months 1 year 2 year 3 year 5 year 7 year 10 year 20 year 30 year

Explanation: -

Short Term interest rates are slightly higher than the long term rates. This is was due to high inflation rates. Also the Federal Bank was expected to tighten the monetary policy in 3-6 months time period. The structure of graph shows uncertainty in two or three year period. As you can see that long term interest rates are lower, a slowdown and rate cut in medium term can be expected.

Mar-07
5.4 5.2 5 4.8 4.6 4.4 4.2 4

Explanation: Classic case of inverted graph and a slowdown in the economy is expected as there is high short term rates and lower long term rates. The news of the sub-prime crises had just started to flow and thus, the economy was not expected to do well in the long term. Also it can be inferred from the graph that Fed is going to aggressively cut rates. However, a decreasing ZCYC slope is ideally an undesirable situation.

Apr-07
5.2 5 4.8 4.6 4.4 4.2

Explanation: This is a historical indicator of the recession to come in the near future as short term rates are higher than the long term rates and we can see that the medium term rates show a drastic dip. However, a decreasing ZCYC slope is ideally an undesirable situation.

May-07
5.1 5 4.9 4.8 4.7 4.6 4.5 4.4 4.3

Explanation: It is expected that though in the long term the US economy may do well in the medium term i.e. 3-7 years, the economy may face problems. With rising inflation, the short term rates are also expected to increase in 3-6 months time frame.

Jun-07
5.2 5.1 5 4.9 4.8 4.7 4.6

Explanation: Even though short term rates are lower, the curve is more of a flattish curve as interest rates are moving from 4.8% to a maximum of 5.15%. With rising inflation, interest rates are expected to go up in the short term; however no major corrections/ monetary policy changes are expected. Though the economy is currently facing a slowdown,it is expected that the economy will recover faster.

Jul-07
5.4 5.2 5 4.8 4.6 4.4 4.2

Explanation: With the interest rates falling down further, the Federal Bank is expected to ease the monetary policy, especially with the slowing down of the economy. But the slowdown will not impact the economy severely as the medium and long term rates are higher.

Aug-07
5.1 5 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2

Explanation: Even though the short term rates are high, the fall of interest rates in the medium term indicates that the market participants are expecting a slowdown in the economy. I.e. a recession is expected in the near future.

Sep-07
5 4.8 4.6 4.4 4.2 4 3.8 3.6

Explanation: By this time period, a few companies had already come up with sub primes issues and had filled for losses and bankruptcy. This led to fall in the interest rates. Also through the chart we can see that in the medium term, the growth in the economy is expected to fall. However as the long term rate are higher slowdown will not be severe.

Oct-07
6 5 4 3 2 1 0

Explanation: With a flattish curve in October, we can see that the short term rates have also started to fall. This indicates that the Federal Bank may cut interest rates in the near future and implement loose monetary policy. This also indicates that the recession may hit the economy soon.

Nov-07
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Explanation: Flattish yield curve indicating that there is uncertainty in the economy and the future will also uncertain.

Dec-07
5 4 3 2 1 0

Explanation: The Federal Bank has not tightened the monetary policy since Long term rates are still high. Even though the economy is not expected to go into a recession, there are strong signals of a slowdown which may lead to job cuts and negative inflation.Shows uncertainty in medium term.

2008
Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel) Jan 08 3.00 4.30 92.83 Feb 08 3.00 4.00 95.35 Mar 08 2.25 4.00 105.42 Apr 08 2.00 3.90 112.46 May 08 2.00 4.20 125.46 Jun 08 2.00 5.00 134.02

Jan 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

It is seen that the economy is hit by slowdown and its going to stay for medium term. However, there are expectations that the economy would recoverin the long run, the growth potential is not affected. Thus, the long term rates are high. In the short run the rates are almost constant as the FED is not expected to raise rates.

Feb 08

5 4 3 2 1 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The curve is declining for short term rates, as we can see from over 2% to less than 2 %. Thus there is short term volatility in the interest rates. However it is upward sloping for the long term. Also the inflation has come down and the FED is expected to cut rates for the short term. Economy is expected to slowdown in near future and the recovery will be faster as the expectations of the long term rates are high

March 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The FED cut rates by 75 bps, more than what was expected. Hence, the short term rates have fallen below 2 %. But inflation and GDP being more or less constant and oil prices rising, the FED is expected to futher cut rates. Economy is expected to slowdown in near future and the recovery will be faster.

April 08

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The FED cut rates by 25 bps which are embebd in the expectations of the graph. Hence short-term rates are rising upwards. Economy is expected to slowdown in near future and the recovery will be faster. As seen from the graph the fed rates are very low indicating that market is flooded with liquidity to boost the economy and it is expected that this measures will help economy recovery faster.

May 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Economy is expected to slowdown in near future and the recovery will be faster. As seen from the graph the fed rates are very low indicating that market is flooded with liquidity to boost the economy and it is expected that this measures will help economy recovery faster.

June 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Economy is expected to slowdown in near future and the recovery will be faster. As seen from the graph the fed rates are very low indicating that market is flooded with liquidity to boost the economy and it is expected that this measures will help economy recovery faster.

Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel)

Jul 08 2.00 5.60 133.48

Aug 08 2.00 5.40 116.69

Sept 08 2.00 4.90 103.76

Oct 08 1.00 3.70 76.72

Nov 08 1.00 1.10 57.44

Dec 08 0 0.25 0.10 42.04

July 08
5 4 3 2 1 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The short term rates and most people expected rates to rise rapidly. FED is not expected to cut or increase rates as inflation is coming down and so are the oil prices. Though economy is expected to slowdown in near future and the recovery will be faster.

August 08
5 4 3 2 1 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The bond yields fell due to the bursting of the housing bubble. Citigroup Inc., Merrill Lynch, UBS AG, Bank of America registered heavy losses and the bond yields fell further. Economy was expected to slowdown in near future and the recovery will be faster.

September 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Explanation: The economy was severely hit by the insolvency declared by Lehman Brothers. Also oil prices were at its peak. As the result of this the GDP growth rate declined to almost 0%. The unemployment rate in US was about 6.2%. Thus a large stimulus package was expected from the government. Also it was expected that the Central Bank would go for emergency rate cut which resulted into the price of the short term bonds rising and thus yields falling considerably. Also banks were unwilling to extend the credit which resulted into liquidity in the market freezing up. Also the 30 year bonds yield slipped to 4.36% from 4.39%. In order to pay for a costly rescue plan, the government would need to sell a lot more debt. On 28th September, the government auctioned $24 billion worth of 5-year notes. The Treasury received bids totaling nearly $46 billion, with a median yield of 3%

October 08
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The graph above shows the period post Lehman crisis when sub prime problem was at its peak. The market expected FED to aggressively cut the FED rate as indicated by slight inverted yield at shorter end of curve. Also at this time a lot of money was looking towards safety as most of the asset classes were in downward trend thus leading to rise in price and fall in yield in short term maturities.

November 08
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Inflation and oil prices fell drastically indicating low demand and the economy was already in recession with GDP growth almost touching zero. The FED is expected to further cut rates to infuse more liquidity in the market.

December 08 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Explanation: The GDP growth rate for the year fell to -1.9%. The unemployment rate increased to about to 7.5% during this quarter. The financial crisis showed up in the yield curve, with rates falling since last month as investors fled to quality. The 3-month rate dropped from an already tiny 0.07 percent down to a miniscule 0.02 percent (the lowest level since the Treasury constant maturity series started in 1982.) .The 10-year rate dropped from 3.38 percent to 2.67. Also it is expected that there would be very low credit growth in the next year which resulted in lower yields of 6 months to 1 year bonds.

2009
Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel) Jan 09 0-0.25 0.00 41.92 Feb 09 0-0.25 0.20 40.37 Mar 09 0-0.25 -0.40 48.94 Apr 09 0-0.25 -0.70 50.89 May 09 0-0.25 -1.30 59.47 Jun 09 0-0.25 -1.40 69.58

January 09 4 3.5 3 2.5 2 1.5 1 0.5 0

In short term, the market expects the FED to continue loose policy as indicated by flat curve at the shorter end. Due to recession in US economy the expectation were of lower interest rate environment. In long run the market expects the yield to rise. The recession is expected to recover at a slow pace.

February 09
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

At shorter end the market expects the FED to continue loose policy as indicated by flat curve at the shorter end. But over long term maturities, liquidity premium theory comes to play thus leading to higher yield. Due to recession in US economy the expectation were of lower interest rate environment. In long run the market expects the yield to rise. The spread again come down due to lower long term rates an indication of weak recovery.

March 09
4 3.5 3 2.5 2 1.5 1 0.5 0

During this period the GDP fell to -3.30%. The unemployment level in the economy was at its peak. Inflation in USA was very much low ie around -0.4% which showed signs of slow economic growth. Also in a move to combat the recession, the Federal Reserve on Wednesday said it would pump more than $1 trillion into the economy which resulted in short term yields going down.. Since last month, the 3-month rate edged downward from an already low 0.30 percent, to an even lower 0.22 percent. The 10-year rate decreased from 2.88 percent to 2.75 percent. Furthermore, both the federal funds target rate and the discount rate have remained low, which tends to result in a steep yield curve.

April 09
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The market expect rate to move higher in the long run and the curve is stable at the shorter end of spectrum. Thus due to weak growth the expectation of rate hike is not there in short term but in long run as economy recovers the market expect rate to move up.

May 09
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The market expect rate to move higher in the long run and the curve is stable at the shorter end of spectrum. Thus due to weak growth the expectation of rate hike is not there in short term but in long run as economy recovers the market expect rate to move up.

June 09
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The yield curve has become noticeably steeper, with long rates rising dramatically rising. The three-month rate has held steady at a low 0.18 percent .The 10 year rate increased a full 61 basis points, from 3.14 percent to 3.75 percent. The inflation rate in the economy further went down to -3.8% leading to the fall in the yield for the shorter term bonds. The central bank was expected to continue easing else, the economy would go into a W-shaped recession again. There was a very high spread between 10 bond and short term bonds.

Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel)

Jul 09 0-0.25 -2.10 64.29

Aug 09 0-0.25 -1.50 71.14

Sept 09 0-0.25 -1.30 69.47

Oct 09 0-0.25 -0.20 75.82

Nov 09 0-0.25 1.80 78.15

Dec 09 0-0.25 2.70 74.60

July 09
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The rates in long term continue to inch upward as market believes growth along with rising inflation would compel FED to exit its loose monetary policy. But at the same time due to double digit unemployment figure the market does not expect the rates to rise in short term. This is indicated by flat curve at shorter end of term structure curve.

August 09
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The rates in long term continue to inch upward as market believes growth along with rising inflation would compel FED to exit its loose monetary policy. But at the same time due to double digit unemployment figure the market does not expect the rates to raise in short term. This is indicated by flat curve at shorter end of term structure curve.

September 09
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The inflation numbers fell to -1.3% and the GDP growth fell to -3.8% The yield curve has steepened slightly, with long rates edging up as short rates edged down. the three-month rate dipped to 0.11. The ten-year rate dropped to 3.46 percent. The Fed in its recent policy kept interest rates close to zero%. Fed is also considering purchase of "$1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt" in a slowing pace until the first quarter of 2010. This resulted in short term yields falling more steeply.

October 09
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The market expect rate to stay flat in long run on back of fragile growth in short run, but the long term rate continues to inch upward indicating inflationary pressure on economy. The spread of more than 350bps between 3month and 30yr bond is indication of lower interest rate scenario to continue in USA.

November 09
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The market expect rate to stay flat in long run on back of fragile growth in short run, but the long term rate continues to inch upward indicating inflationary pressure on economy.

December 09
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

The inflation rate grew to 2.7% from -1.3% from last quarter showing signs of economic recovery as contributed by positive growth rate in GDP. Oil prices increased from 61$in September to 70$in December. However during this period commercial lending was still low. The dilemma was that US banks could borrow for almost nothing and lend money to the government by buying 30-year Treasury Bonds with yields of 4.6%. Thus, the banks were thriving on the yield curve while the poor slob on the street got nothing for his savings (assuming he had any savings at all). And in terms of point of view for a bank, why should they make risky loans to the poor goof on Main Street when they can play the yield curve with almost zero risk. Lending needs to expand before a decent economic recovery can get under way.

2010
Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel) Jan 10 0-0.25 2.60 77.70 Feb 10 0-0.25 2.10 76.46 Mar 10 0-0.25 2.30 81.29 Apr 10 0-0.25 2.20 84.58 May 10 0-0.25 2.00 74.12 Jun 10 0-0.25 1.10 75.40

January
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

At the shorter end the market expect rates to stay flat but long term rate have risen above 4.5. The widening spread indicates that the rates would rise in future as US economy recovers. Also another reason for higher long term rates could be record budget deficit and market expects that in long term record government borrowing of more than $1trn would force bond investor to ask for higher rate thus validating liquidity premium theory. Further record government borrowing would further put pressure on bond prices leading to higher yield.

February
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The short term rates are unusually low. The interest rates upto 3 years are almost 0. The economy is into deflation. The situation has worsened due to lack of jobs which has lowered demand. The economy is clearly into recession. Recovery is expected in the long run say after a period of 3-5 years.

March
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The graph is similar to the previous one. The graph indicates that the recession is here to stay and recovery is going to be slow and painful.

April
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

All the 3 graphs starting from Feb to April, represent growth, but as mentioned earlier growth is going to be slow and painful. Monetary poilicy is going to be easy . Short term interest rates continued to remain low in order to inject liquidity in the system.

May
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

As per this graph recovery expected t to come up as the 3 yr yields are slightly better than the previous yields. Short term interest rates are near zero and the yield curves are rising at the longer end indicating that the USA markets will recover in long run. But this recovery may be painful and very slow.

June
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Stock markets showed recovery but the bond markets were yet to pick up. Long term yields have come down. Again fall in inflation and falling oil prices indicate a low demand. This shows the employment situation in the US needs to show more improvement.
Details Fed Rates Inflation Rate Oil Prices (USD/ Barrel) Jul 10 0-0.25 1.20 76.53 Aug 10 0-0.25 1.10 76.67 Sept 10 0-0.25 1.10 75.55 Oct 10 0-0.25 1.20 81.97 Nov 10 0-0.25 1.10 84.31 Dec 10 0-0.25 1.50 89.33

July

ZCYC
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR ZCYC

In the Q2,stock markets started rising, but the bond market rates were coming down. Unemployment rate has come down but not till a great extent. The FED is expected to take some action, however the long term yields have fallen.

August
4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Due to growing concerns of deflation short terms interest rates have become almost negligible. The graph has become flatter and flatter. Long term interest rates have also reduced indicating that recovery of the economy is going to be slow. Earlier it was expected that the recovery would take place in around 2 years, however that has fallen down as we can see the interest rates for 3 years are almost zero.

September
4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

The recovery is going to take around 3-4 years as short term rates are low. Since practically there is no inflation in the economy the FED is not expected to rise rates.

October
4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

Again here the short term interest rates are very low and the interest rates are rising in the long run indicating that recovery in USA will be slow and gradual process. Deflation concern in USA economy has been avoided because of easy monetary policy.

November
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR

This graph is similar to previous graph. Deflation has been controlled due to easy monetary policy. The econonmy is slowly moving towards recovery. Obama s visit to India and Indonesia has instilled some hope in the econmy.

December

ZCYC
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1M 3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR 30YR ZCYC

QEII also you can see that Inflation is marginally rising. The economy is inching towards recovery and the GDP is expected to grow over the period 1-2 years. Also the employment levels have improved.