Thursday, February 10, 2011

Fallacy #1

Fallacy #1, the bond traders control the long-end of the maturity curve while the Fed controls the short-end of the curve because it sets short-term interest rates is very stable. I believe that as a percentage of price the short-end of the yield curve is more volatile than the long-end and the chart below shows the yield changes of the 90-Day T-Bill for the 12 months ending 2/10/2011.

So those who doubt the swings in the yields of 90-Day T-Bills may want to look at the second chart which shows the volatility of the 90-Day Bill vs, the 2 year T-note. The white line on the chart is the 90-Day Bill and the yellow line on the bottom is the 2-year note. Again you see the volatility of the three month bill. One thing to see in the chart is the calamitous decline during he flash crash of the stock market in May when the bill plummeted and traded at a negative return. I'm working on he 30 chart and as soon as I get it I will forward it to you.

Dan Perkins

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