Tuesday, March 25, 2014

Interest Rates in 2008

Here are a few more graphs from 2008.  I will leave most of the exposition to anyone else who would like to chime in.  A few patterns I see:

1) The Fed Funds rate was especially high, compared to short term treasury rates, from December 2007 to June 2008.

2) There appears to be a distinct pattern in October & November 2008, around the implementation of interest on reserves.  It doesn't seem to affect short term rates much, but as you move out on the yield curve, rates were declining; they would bottom the day of the IOR increase, rise for a few days, then begin to decline again; then bottom and begin rising again the day IOR were increased again.

3) Rates across the curve collapsed in November and December 2008.  The 10 year rate was 4% at the end of October, 3% on November 26, after QE1 was announced, and bottom at 2.1% on December 18, soon after the Fed Funds Rate was pushed to near 0% and QE1 was formally started.

 4)  The 3 year rate declined, uninterrupted, from July 2008 until the implementation of QE1 in mid-December.  Longer term bonds had similar declines, but with a hump, where long term (7 year and longer) rates jumped, coincident with IOR announcements, before eventually falling again.  The entire curve shifted down about 2% from July to December, in this fashion.  The IOR increases seem to have had no effect on the very short end of the yield curve.

(Added: One other interesting thing about the 2007-8 period that appears to be the case, in reference to the top graph, is that in past cycles, the slope of the yield curve at the shorter durations has fluctuated with higher frequency and amplitude than the longer-duration yield curve.  But, in 2007 & 2008, the slope of the yield curve under 3 years remained suppressed while the yield curve in the longer durations moved up.  This is evident in the second graph, where the 3 year treasury yield (red) tracks with the 1 year treasury yield through 2007 until March 2008.  So, while traditional yield curve indicators would have shown steepening in early 2008 because of the higher 10 year yields, the yield curve at the time was flat at durations 3 years and under.  This was before we hit the zero lower bound.  Short term rates were at 2% and above during this period.)

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