1. The Steepening Yield Curve
for U.S. Treasuries
2016
WEEK OF FEBRUARY 22, 2016
AUSTIN POLK
FINANCE 401-MONEY AND CAPITAL MARKETS | Southeast Louisiana University School of Business

2. 2
Austin Polk
Danielle Lewis, Ph.D.
Finance 401-01
14 March 2016
The Steepening Yield Curve for U.S. Treasuries
During the week of February 22, 2016, the overall yield curve for U.S. Treasury
securities steepened. The steepening of the yield curve indicates that investors
predict an increase in future rates. With investors expecting rates to rise in the
future, they are selling their long-term securities in exchange for short-term
securities. This increase in the demand for short-term securities raises the price
which forces the interest rates to lower. Investors push the price down, by selling
their long-term securities causing the rates to increase on the long-term end of the
yield curve; this is consistent with Figure 1.1.
Figure 1.1
0
0.5
1
1.5
2
2.5
3
R1 R3 R5 R7 R9 R11 R13 R15 R21 R23 R25 R27 R29
YIELDTOMATURITY
TIME TO MATURITY
Treasury Rate Yield Curve
2/22/2016 2/26/2016

3. 3
There are various factors that contribute to the daily effects of the yield
curve. The curve flattened from Monday to Tuesday, see Figure 1.2, with an average
percent change in yield of -1.323%. One of the factors to which this flattening trend
can be attributed to, is the weakening of the British pound against the U.S.
dollar. This weakening of the
currency is due to what is being
called “Brexit”; the campaign for
Britain to exit the European
Union. “Brexit” is causing
investors to buy more treasury
securities which makes prices increase while yields drop.
According to Christopher Maloney and Elizabeth Stanton, reporters for Bloomberg, the
British pound has fallen a total of 1.74% ("U.S. Rates/Credit Daybook: Chicago Fed
Index; $67b 3M/6M Bills"). Another factor causing the yield curve to flatten, is the
global oil crisis. On Monday, there was a rally for oil and global equities, which
reduced the demand for treasury securities, causing the prices of treasuries to fall
and the rates to increase. On Tuesday, however, reports were issued stating that
Saudi Arabia had refused to cut their oil production. This news caused a slide in oil
and stock prices, which in turn increased the demand for treasury securities
("Treasuries Climb as Sliding Stocks, Oil Boost Demand for Havens"). The events on
Tuesday both caused the yield curve to flatten because investors’ expectations
relating to global concerns were sparking uncertainty, driving them to participate in
less risky investments, such as U.S. Treasuries.
0
0.5
1
1.5
2
2.5
3
R1 R3 R5 R7 R9 R11 R13 R15 R21 R23 R25 R27 R29
YIELDTOMATURITY
TIME TO MATURITY
Treasury Rate Yield Curve
2/22/2016 2/23/2016
Figure 1.2

4. 4
The smallest change of the week occurred from Tuesday to Wednesday which
had an average percent change in
yields of -0.0485%. The flattening
of the yield curve is illustrated in
Figure 1.3, representing the small
percent change. The yields for
Tuesday and Wednesday are seen
as moving almost in tandem with each other over the entire yield
curve. A possible cause for the slight flattening of the yield curve
is that on Wednesday there was an auction scheduled for $13 billion worth of two year
Floating Rate Notes (FRNs), and $34 billion worth of five year securities ("U.S.
Rates/Credit Daybook: Chicago Fed Index; $67b 3M/6M Bills"). The U.S. sold the five
year securities at the “lowest yield at an auction of the securities since 2013”
("Treasuries Decline as Oil Rally Reduces Demand for Haven Assets"). This would
cause the short-term rates to decrease slightly; nevertheless, the rates moved right
back in tandem with Tuesday’s yields quickly after R2.
From Wednesday to Thursday,
there was a more substantial
flattening of the yield curve (Figure
1.4) at an average percent change of
-2.5937%. A report emerged
Thursday warning of a Global
recession. This warning came from
0
0.5
1
1.5
2
2.5
3
R1 R3 R5 R7 R9 R11 R13 R15 R21 R23 R25 R27 R29
YIELDTOMATURITY
TIME TO MATURITY
Treasury Rate Yield Curve
2/23/2016 2/24/2016
Figure 1.3
0
0.5
1
1.5
2
2.5
3
R1 R3 R5 R7 R9 R11 R13 R15 R21 R23 R25 R27 R29
YIELDTOMATURITY
TIME TO MATURITY
Treasury Rate Yield Curve
2/24/2016 2/25/2016
Figure 1.4

5. 5
one of the primary dealers of the U.S. treasury’s securities, Citigroup Inc. The report
also mentions that it is “risk off in the financial market” ("U.S. Notes Gain for Fifth
Week as Citigroup Warns of Recession"). This means that investors are moving from
equities to treasury securities. The Brexit issue also caused investors to run to
treasuries, or haven assets, on Thursday due to the fear that Britain leaving the
European Union would cause massive global turmoil ("Treasuries Gain on Speculation
Foreign Turmoil Is Driving Demand"). The Brexit movement and the Citigroup Inc.
warning, both caused investors to flee the equities market for the treasuries market.
This run to the treasuries caused prices to rise at the influx of investors which in turn
made the yields fall. David Ader, Head of rates strategy with CRT Capital Group LLC
in Stamford, Connecticut said, “We’re not trading the norms of what we typically look
at in here. We’re not trading data, we’re not trading inflation--we’re trading fear.
We are being held hostage to activities overseas” ("Treasuries Gain on Speculation
Foreign Turmoil Is Driving Demand"). What David Ader means is that investors are
trading because they are scared of how the global concerns facing Europe’s political
future will affect the U.S. economies as well as the markets.

6. 6
On Friday, the market turned around. According to Alexandra Scaggs, a reporter for
Bloomberg, the gauges of growth for the U.S., such as price growth, economic
growth, consumer spending, and
consumer sentiment, were all
higher than the economists had
expected ("Treasuries Plunge as
Economic Growth, Inflation Exceed
Forecasts"). This means that the
economic expectations from investors were improving as well as
causing the yield curve to steepen at an average percent change of 5.2099%. This was
a substantial steepening of the treasuries yield curve (Figure 1.5). The report claims
that some of the recession fears were over-exaggerated, causing the fear aspect of
the market to lessen ("Treasuries Plunge as Economic Growth, Inflation Exceed
Forecasts"). The increase in economic expectations caused people to sell off their
treasuries and to start buying more risky assets. This caused the price to fall for the
first time all week, which in turn caused the rates to surge. The magnitude of this
steepening in the yield curve is what caused the overall yield curve for the week to
have steepened.
0
0.5
1
1.5
2
2.5
3
R1 R3 R5 R7 R9 R11 R13 R15 R21 R23 R25 R27 R29
YIELDTOMATURITY TIME TO MATURITY
Treasury Rate Yield Curve
2/25/2016 2/26/2016
Figure 1.5

7. 7
After analyzing the yield curve changes over the course of the week it is clear
to see that the overall yield curve has steepened. The investor’s expectation of rising
interest rates is consistent with the forecast made regarding future interest rates.
Based off of the interest rates from this week, as well as the steepening of the yield
curve, interest rates should increase over the next ten years. This can be seen in
Figure 1.6. Between Monday and
Friday, there are some small
fluctuations in the forecast, and
these fluctuations can be
attributed to the treasury auctions
that were held over the course of
the week. The massive influx of securities being purchased at
lower yields during the week caused the interest rates to fluctuate which in turn
caused the forecast to fluctuate. It should be noted that the fluctuations on the
forecast curve are consistent with the securities being auctioned off during the week.
Overall, during the week of February 22, 2016 the yield curve steepened. This
steepening effect was caused by the positive expectations regarding economic
growth. The positive expectations caused investors to move out of long-term
securities into short-term securities because they expect interest rates to rise in the
future, and they do not want to be stuck in a low yielding long-term security as
interest rates are rising. The forecast made is consistent with this expectation.
Interest rates should rise in the next ten years. It is very clear to see that the various
economic conditions that took place over the week greatly affected interest rates
0
0.5
1
1.5
2
2.5
3
F2 F3 F4 F5 F6 F7 F8 F9 F10 F11
INTERESTRATES
TIME
Interest Rate Forecast
2/22/2016 2/26/2016
Figure 1.6

8. 8
causing the yield curve to both steepen and flatten. The “Brexit” movement caused
flattening of the yield curve based off of investor uncertainty. The global oil crisis
caused the yield curve to flatten due to Saudi Arabia not cutting oil production. Even
with both of these factors trying to flatten the curve, the expectations of investors is
what caused the largest movement. The investor’s expectations were so great that it
turned a substantially flattening yield curve into a steepening yield curve.

9. 9
Works Cited
Goodman, Wes. "U.S. Notes Gain for Fifth Week as Citigroup Warns of
Recession." Bloomberg. N.p., 26 Feb. 2016. Web. 14 Mar. 2016.
Maloney, Chistopher, and Elizabeth Stanton. "U.S. Rates/Credit Daybook: Chicago Fed
Index; $67b 3M/6M Bills." Bloomberg. N.p., 22 Feb. 2016. Web. 14 Mar. 2016.
Scaggs, Alexandra. "Treasuries Climb as Sliding Stocks, Oil Boost Demand for
Havens." Bloomberg. N.p., 23 Feb. 2016. Web. 14 Mar. 2016.
Scaggs, Alexandra. "Treasuries Decline as Oil Rally Reduces Demand for Haven
Assets." Bloomberg. N.p., 24 Feb. 2016. Web. 14 Mar. 2016.
Scaggs, Alexandra. "Treasuries Plunge as Economic Growth, Inflation Exceed
Forecasts." Bloomberg. N.p., 26 Feb. 2016. Web. 14 Mar. 2016.
Wong, Andrea, and Alexandra Scaggs. "Treasuries Gain on Speculation Foreign Turmoil Is
Driving Demand." Bloomberg. N.p., 25 Feb. 2016. Web. 14 Mar. 2016.