Macro: the yield curve, the central bank and the calendar

MKT · Chapter 412 min readAsked at Jane Street, DRW, Citadel, Optiver

After this lesson you should be able to

  • Read the shape of a yield curve as a statement about expected rates.
  • Say what a central bank actually controls and what it does not.
  • Name the releases that move markets and why volatility concentrates around them.

You are not expected to forecast the economy. You are expected to know what the major instruments are telling you, what moves them, and when — because a market maker who does not know that a rate decision lands at two o’clock will be quoting normal width into a jump.

Proposition 4.1

What the curve says

A long yield is roughly an average of the short rates expected over its life, plus a term premium. So an upward-sloping curve means the market expects rates to rise or demands compensation for duration; an inverted curve means it expects cuts, which usually means it expects a slowdown. The shape is an expectation, not a mispricing.

Holds when

  • Inversion has preceded most US recessions, with long and variable lags — it is a signal, not a timer.
  • The term premium is not observable and is the reason the pure expectations reading is only approximate.
  • The 2s10s and 3m10s spreads are the two people quote.

What a central bank controls. It sets a very short rate and talks about the future. That is the whole toolkit in normal times, and almost all of its influence on the ten-year comes through the second half — the market prices the path it expects, so guidance moves long yields far more than the current decision does. This is why a meeting that leaves rates unchanged can move markets violently: the decision was known, the language was not. When candidates say "the Fed sets interest rates" they are describing about two per cent of the curve.

ReleaseFrequencyWhy markets move
Central bank decision and statementRoughly every six weeksThe path, not the level — guidance dominates
Inflation (CPI)MonthlyDirectly changes the expected rate path
Employment reportMonthlyThe other half of the mandate
GDPQuarterly, revisedBackward-looking; usually less of a mover
EarningsQuarterly, clusteredSingle-name volatility concentrates here
Index rebalanceQuarterlyDated, forced flow into the close
Table 4.2 · The releases that matter. Options desks quote around this calendar explicitly: an implied volatility that spans an earnings date or a CPI print carries an event premium, and the term structure kinks around it.

Example 4.3

Stripping out an event

A stock has 30%30\% implied volatility for a 30-day option spanning earnings, and 20%20\% for one expiring just before. What move is the market pricing for the event?

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Worked solution

  1. Formula
    σtotal2T=σbase2T+σevent2\sigma_{\text{total}}^2 T = \sigma_{\text{base}}^2 T + \sigma_{\text{event}}^2
  2. Substitute
    T=30252,0.302T−0.202T=σevent2T = \tfrac{30}{252}, \quad 0.30^2 T - 0.20^2 T = \sigma_{\text{event}}^2
  3. Solve
    (0.09−0.04)×30252=0.05×0.1190=0.005952(0.09 - 0.04)\times \tfrac{30}{252} = 0.05 \times 0.1190 = 0.005952
  4. σevent=0.005952≈0.0771\sigma_{\text{event}} = \sqrt{0.005952} \approx 0.0771
  5. Answer
    about a 7.7% one-day move\text{about a } 7.7\% \text{ one-day move}

Sanity check. Variances add, volatilities do not — the whole calculation is done in variance and converted back at the end. A 7.7%7.7\% earnings move is entirely typical for a single name, which is the check that the arithmetic is sane.

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Macro: the yield curve, the central bank and the calendar · QuantMax