How to monitor interest rates?
Introduction
Every investor needs to learn to how monitor changing interest rates. Of course, changing interest rates have a direct impact on the value of fixed-income securities like bonds and preferred stocks. But changing interest rates can also have an indirect effect on stocks, and the U.S. economy as a whole. So investors should develop a good routine and set of tools to constantly monitor interest rates. This page gives you some tips on key interest rate indexes to monitor.
Key indexes
DFFIndex — Effective Federal Funds Rate
The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate. The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target. The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. As previously stated, this rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt). The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.
DPRIME — Bank Prime Loan Rate
The Index represents the rate posted by a majority of top 25 (by assets in domestic offices) insured U.S.-chartered commercial banks. Prime is one of several base rates used by banks to price short-term business loans.
MORTGAGE30US — 30-Year Fixed Rate Mortgage Average in the United States
The Index shows the average 30 year fixed rate mortgage in the United States. Updated weekly.
SOFR — Secured Overnight Financing Rate (SOFR)
The secured overnight financing rate, or SOFR, is an influential interest rate that banks use to price U.S. dollar-denominated derivatives and loans. The daily SOFR is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets. The New York Federal Reserve began publishing the rate in April 2018 as part of an effort to replace LIBOR, a long-standing benchmark rate used around the world.Updated daily.
T10Y2Y — 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity Index
This Index represents the spread between 10-Year Treasury Constant Maturity and 2-Year Treasury Constant Maturity. The difference in yield between "intermediate" and "short-term" bonds is constantly changing. This Index is one way to monitor the "flatness" or "steepness" of the yield curve.
TNX — CBOE Ten Year Treasury Note Yield Index
The Index is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note. The notes are usually auctioned every three months following the refunding cycle: February, May, August and November. We use TNX throughout stoxray.com as a good "general" gauge of the current interest rate environment.
USD3MTD156N — 3-Month London Interbank Offered Rate (LIBOR)
The 3-month London Interbank Offered Rate or "LIBOR" is the average interest rate at which leading banks borrow funds of a sizeable amount from other banks in the London market. LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. A lot of floating rate bonds and bank loans are tied to changes in the LIBOR. Floating rate securities will typically have an interest rate equal to the 3-month LIBOR plus a certain percentage rate. The data is lagged by one week due to an agreement with the source. LIBOR is eventually going to be replaced by SOFR, the Secured Overnight Financing Rate.