As I write this, the national debt is about $16.8 trillion dollars. What is the

Question

As I write this, the national debt is about $16.8 trillion dollars. What is the current Treasury bill rate? Is that rate low or high? If you consider the Loanable Funds Theory, does that level of interest rates make sense? Why or why not? Also, there are several theories about the reason the yield curve is shaped the way it is and why it changes from time to time. What are they? Is there one that you believe explains the shape better than the others? Why? Is there a place you can visit that would give you evidence of the shape of the yield curve at the present time?

Explanation / Answer

The Treasury bill rates is the lieu for risk free rate as it is indicative of the sovereign risk. The rate of interest incorporates the various risk associated with the investment in the instrument. In that regard, sovereign risk is only risk that is associated with the risk free rate and the level of development in the sovereign has huge impact on the rate of return. As we know that higher risk yields higher returns and as such a developed nation poses nominal risk that translates into lower return or in this case lower risk free rate.This should help understand the case of Treasury bill rate.

As per Loanbale Funds theory, the rate of interest is determined based on the supply and demand of fund flow in the financial system. So, saving results in fund inflow and borrowing leads to fund outflow. So, the rate of interest should be lower in case there is more savings than borrowing in the form of loans.

The yield curve is a reflection of the future anticipated movement in the interest rate. In the case of a normal yield curve, the uncertainity associated with interest rate movement and various other unknown factors makes a person skeptical about investing for long time. So to lure a person to invest in long term one needs to compensate the risk by offering higher interest for long term than for short term. It is defering the demand for short term to long term by offering higher interest rates. There is no specific yield curve that serves all purpose because yield curve changes with the economy which in itself is dynamic. Also, yield curve is an expectation of the future based on historical information and hence is simply indicative and everchanging.

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