Staying Ahead of the Yield Curve

Keynote Presentation by Chris Waller

Presentation slides (PDF)

During this session, St. Louis Fed economist Chris Waller talked about the yield curve, a plot of a Treasury bond’s maturity against its rate of return at a given point in time. Waller, executive vice president and director of research, said that the yield curve is normally upward-sloping, with 10-year Treasuries paying higher interest rates than two-year or three-month bonds. But after the Federal Open Market Committee started raising its policy rate in December 2015, rates for short-term debt increased and the 10-year Treasury “didn’t budge,” Waller said. That flattened the yield curve and pushed it toward inversion, which is when short-term debt has higher interest rates than long-term debt. Inversion of the yield curve often comes before recessions.

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Introduction by David Wheelock

Unless you’re an investor in the bond market, you might not know about the yield curve, but it has been an “amazingly good predictor” of recessions, economist David Wheelock said in his introduction to Waller’s presentation. The puzzle is why the yield curve has been such a good predictor and whether it will continue to be one, said Wheelock, group vice president and deputy director of research.

Audience Q&A

After Waller’s presentation, Wheelock led a panel discussion with Waller and Fernando Martin, a senior economist. They discussed why governments don’t issue only short-term debt. The panel also discussed the argument that if rates aren’t raised, inflation will take off. The panelists responded to questions and comments on a variety of topics, including a growing supply of government debt, exchange rates, zero-coupon bonds, central banks’ balance sheets and the demand for Treasury bonds.