Greetings, let’s talk about interaction between long term and short term interest rates. Bond yields depend on market participant predictions (but not the only!) of inflation. Therefore we can expect that basis interest rates, which react at inflation processes in economy, more influence short term rates and less long term. Factors which have an impact onto the yields were discussed in the article “yield curve”.

Long and short term interest rate interaction

At the same time, changes in basis interest rates have direct and indirect impact on long term bond yields (and value). At the same time the more days is till maturity date the less impact will occur but it does not mean that they will not impact at all. The level of impact is different but all we know that interest rates has to move in the same directions. Sound a bit strange knowing that long-term rates fluctuate more yeah? Well, here I speak more about time periods not the resulting

John Murphy is one of the traders who implemented financial market interactions in trading. In his book “Intermarket technical Analysis” he wrote that changes in basis interest rates firstly influence short-term rates and later long term-rates. It means that trend changes in US Treasury Bills and Eurodollars happen earlier than in long term T-notes and T-bonds.

Does it work so? Let’s check whether short-term market rates are “faster” than long-term interest rates.

As you can see (I hope) short term rates sometimes are faster than long-term but not always. Here we can conclude: as all interest rates must move in the same direction we can find some divergences in short time periods so called “non parallel shifts” and make trades predicting that interest rates will follow each other.

This knowledge may be especially useful for those who trade US bond futures.