Lesson 1
The Rate Structure
Watch multiple rates to understand the full picture. 2Y tells you Fed expectations. 10Y tells you where borrowing costs are heading. The spread between them (yield curve (T10Y2Y)) tells you about recession risk.
📊 Indicators mentioned in this lesson (click for details):
Interest rates aren't just 'the interest rate.' There's an entire structure of rates, each with different meanings and implications.
The Key Rates:
Fed Funds Rate (Fed Controls):
- Overnight rate for bank-to-bank lending
- The Fed's primary policy tool
- Everything else is priced relative to this
- Current target: announced after each FOMC meeting
2-Year Treasury (DGS2) (Market Sets):
- Near-term Fed policy expectations
- If 2Y is above Fed Funds, market expects hikes
- If 2Y is below Fed Funds, market expects cuts
- Leads Fed moves by 6-12 months
10-Year Treasury (DGS10) (Market Sets):
- Long-term growth + inflation expectations + term premium
- Benchmark for mortgages, corporate debt, valuations
- Fed influence is weaker here — it's market-driven
- The 'risk-free rate' for DCF models
30-Year Treasury (Market Sets):
- Very long-term expectations
- Dominated by pension funds, insurers
- Less liquid than 10Y
- Includes more 'term premium'
SOFR (Secured Overnight Financing Rate):
- Market rate for secured overnight borrowing
- Replaced LIBOR as the benchmark
- Reflects actual funding conditions in money markets
- Compare to IORB to detect plumbing stress
The Hierarchy:
Fed controls overnight rates. The market sets everything longer. The Fed can influence longer rates through QE/QT (buying/selling) and forward guidance (expectations), but can't fully control them.
Check your understanding
Lesson Quiz
Quiz Check
What's the difference between the Fed Funds rate and the 2-Year Treasury (DGS2) yield?
Quiz Check
The 10-Year Treasury (DGS10) yield is spiking while the Fed hasn't changed policy. What could be happening?
Quiz Check
Why does the 10-Year Treasury (DGS10) yield affect stock valuations?