Treasury Yield Skewness

Treasury Yield Skewness provides daily indicators measuring the risks to the future outlook for interest rates, based on prices of Treasury derivatives and the methodology of Bauer and Chernov (2024).

The implied skewness (ISK) is calculated as the usual skewness coefficient—third centered moment divided by the scaled variance—but with option-implied moments. These moments are derived from prices of 10-year T-note futures and options from CME Group as described in Bauer and Chernov (2024). The resulting series, ISK, measures the balance of risk for changes in the 10-year Treasury yield until the contract expiration, which is 1-3 months after the trading date. For additional details, see Bauer and Chernov (2024) and the paper’s online appendix.

The intuitive interpretation of ISK is straightforward: Positive values indicate that market participants view large increases in yields to be more probable than large decreases. This means that there is more upside risk than downside risk to Treasury yields over the coming months. Negative values, by contrast, suggest that there is more downside risk than upside risk.

This daily indicator has significant predictive power for future bond returns, interest rate changes around FOMC announcements, and survey forecast errors for interest rates, as documented in Bauer and Chernov (2024). In the context of high-frequency event studies of FOMC announcements, Bauer and Swanson (2023) show that ISK is an important predictor for the commonly used “monetary policy surprises” around the announcements, and therefore include it in their regression to create truly unpredictable surprises.

References

Bauer, Michael D., and Mikhail Chernov. 2024. “Interest Rate Skewness and Biased Beliefs.” Journal of Finance 79(1, February).

Bauer, Michael D., and Eric T. Swanson. 2023. “A Reassessment of Monetary Policy Surprises and High-Frequency Identification.” NBER Macroeconomic Annual 23.

Download Data

Daily Treasury Yield Skewness (Excel file, 284 kb)