Table 7.1. Daily Treasury Yield Curve Rates
Source: U.S. Treasury
These yields can be graphed into what is known as a yield curve. The yield curve will shift as the various rates change so there will be a new yield curve every day. Note that the longer the maturity of the Treasury Notes and Bonds, the higher the interest rate. To put it simply, the longer the maturity, the higher the expectation of a bigger inflation rate, thus the expected inflation component increases. Note that during the Pandemic Recession, the Federal Reserve Bank reduced short-term interest rates to effectively zero and reduced long-term interest rates to historical lows by buying Treasury Notes. For an example, see below for the historical rates on the bond market bellwether: the Ten-Year Treasury Note. (A bellwether is a leader or a leading indicator of a trend. The lead sheep of a flock has a bell around its neck and is called the bellwether.)
Figure 7.6. Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [GS10], retrieved from FRED, Federal Reserve Bank of St. Louis; October 1, 2021.
Looking back at setting interest rates, we can examine auto loans and mortgages to get a better idea of how this works. For an auto loan of 48 months, banks will take the 5-year Treasury Note and add a risk premium. For a 30-year mortgage, banks will take the 10-year Treasury Note and add a risk premium. By subtracting the corresponding Treasury Note rate to the auto loan or mortgage rate, we can calculate the risk premium. For example, this is how these rates looked as of August 7, 2020.
Table 7.2. Auto Loan and Mortgage Rates
The risk premium added to the similar term length U.S. Treasury Bill or Bond often follows the default rate on that type of loan. This is because if, for example, 3% of your automobile loans are not paid back, you have to recover that 3% before you can earn any interest. Here are the historical delinquency rates on various loans (90 days overdue):
Figure 7.7. Board of Governors of the Federal Reserve System (US), Delinquency Rate on Consumer Loans, All Commercial Banks [DRCLACBS]; Delinquency Rate on Credit Card Loans, All Commercial Banks [DRCCLACBS]; Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offces, All Commercial Banks [DRSFRMACBS]; retrieved from FRED, Federal Reserve Bank of St. Louis; October 1, 2021