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In Bonds, Look for the 2% Warning

NEW YORK ( AdviceIQ) -- Football has its two-minute warning. Bonds have a two-percent warning. When it sounds and the 10-year Treasury nudges past 2%, look out: Things are going to change for the worse.

In professional football, the two-minute warning flashes when that much game time remain on the game clock, approaching the end of the second and fourth quarters. If the ball is in play when the clock reaches two minutes, officials call this warning immediately after the play concludes and declare the ball dead.

This month, the U.S. Treasury yield curve flashed a 2% warning. Unlike in athletics, no one declared the bond market football dead, and minutes later the game did not stop.

Legendary football coach Vince Lombardi was a stickler for fundamentals. When the Green Bay Packers lost to a team judged inferior, the next morning the dejected players had no idea what to expect from their respected but feared coach. Announcing to the team that "We go back to basics this morning," holding a football high in the air, strategist Lombardi yelled, "Gentleman, this is a football!"

While the now famous statement may seem sophomoric, it was brilliantly effective. So without insulting your intelligence, kindly allow a review of fundamentals.

Since U. S. Treasury securities theoretically are immune from default or credit risk, the Treasury yield curve is a key benchmark for debt markets. Uncle Sam borrows money and issues IOUs backed by taxpayers.

Treasury bills cover terms of less than a year. Treasury notes are issued in terms of two, three, five and 10 years; Treasury bonds, 20 and 30 years. The yield curve is a graph reflecting interest rates paid on paper covering one month to 30 years. It appears in major financial and business mediums and on numerous financial websites. The yield on the 10-year note is widely followed as a harbinger of things to come. Are yields rising or falling, and what does that mean?
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