Introduction to the yield curve발음듣기
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Introduction to the yield curve
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Before we proceed further and get a little bit better understanding of why maybe some of these investors were so keen on investing in mortgage backed securities, essentially loaning this money to all these people who are buying these ever appreciating houses, I think we need to a few more tools in our tool belt.발음듣기
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And hopefully, after about the next five or ten minutes, you will know a lot about the yield curve.발음듣기
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So when most people talk about the yield curve, they're talking about the treasury yield curve.발음듣기
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So these treasury securities, whether they're T-Bills, treasury bills, treasury notes, or treasury bonds.발음듣기
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Because if you lend to the federal government and they're running short of cash, all they have to do is increase taxes on us the people and they can pay back your debt.발음듣기
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So in dollar denominated terms, the treasury bills, notes, and bonds are about as safe as you can get in terms of lending your money to anyone.발음듣기
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So when most people talk about the yield curve, they're talking about the risk-free yield curve.발음듣기
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So if I give a loan to the government for $1,000 for six months, that will be a treasury bill.발음듣기
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And that treasury bill from the government is essentially just an IOU saying that I'm going to give you your money back in six months with interest. Similarly, if it's three months, it's a three month treasury bill.발음듣기
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So on this graph that we're going to make using the actual yield curve rates, from zero to one year - and actually there's no zero year treasury bill.발음듣기
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If I'm lending money to someone for a month versus lending money to that person for a year, in which situation am I probably taking on more risk?발음듣기
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Well, sure, if I'm lending someone for a month, I know only so much can happen in that month.발음듣기
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Not just obviously in dollar terms, but even adjusted for time, I would expect less interest for that month.발음듣기
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When I say that I'm charging 6% interest for that month, that doesn't mean that after a month the person is going to pay me 6% on my money.발음듣기
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It means that if I were to give that money to somebody for a month, and they were to pay it back.발음듣기
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And then I were to give that money to, say, that same person, or another person, for a month, and I were to keep doing that for a year, then in aggregate I would get 6%.발음듣기
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So that 6%, no matter what duration we talk about, whether one month, one year, five years, 15 years, when we talk about the interest rate, that's the rate that on average we would get for a year.발음듣기
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In a year there might be more inflation, the dollar might collapse, I might be passing on better investments, I might need the cash in a year's time, while I have a lot of confidence that I don't need the cash in a month's time.발음듣기
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So in general, you expect less interest when you loan money for a shorter period time than a longer period of time.발음듣기
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And remember, if it's $1,000 it's not like I'm going to get 1.2% on that $1,000 just after a month.발음듣기
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And then it does seem that the overall trend is that I expect more and more money as I lend money to the government for larger and larger periods of time.발음듣기
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And this is a little interesting anomaly that you get a little bit more interest for one month than three months.발음듣기
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And we'll do a more advanced presentation later as to why you might get lower yields for longer duration investments.발음듣기
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Someone can look at that graph and say, well, in general what type of rates am I getting for lending to the government?발음듣기
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On a risk-free free basis, or as risk-free as anything we can expect, what type of rates am I getting when I lend to the government for different periods of time?발음듣기
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Because, as I said, when you lend money for a longer period of time, you're kind of taking on more risk.발음듣기
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Well, when the treasury, the government, needs to borrow money, what it does is say, hey everyone we need to borrow a billion dollars from you, because we can't control are spending.발음듣기
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And the world, investors from everywhere, they go in, they say, well, this is a safe place to put my cash for a month.발음듣기
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So if there are a lot of people who want to buy those one month treasuries, the rate might be a little bit lower.발음듣기
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Similarly, if for whatever reason people don't want to keep their money in the dollar, they think the U.S. might default on their debt one day, and not that many people want to invest in the treasury, then that auction,발음듣기
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the government is going to have to pay a higher interest rate to people for them to loan money to it.발음듣기
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So they do it for one month, three months, six months, one year, two year, three year, et cetera.발음듣기
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Once the government has done that auction - You give the money to the government, they give you an IOU called a T-bill.발음듣기
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But then after the auction, and a lot of people had demand, but then a lot of people get freaked out.발음듣기
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And the public markets, when you try to sell that treasury, will then expect. a higher yield.발음듣기
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