Yield Curve

This is very much tied in with Bonds

a yield curve is a graphical representation of yields over time
it’s often depicted by plotting the yield of any given bond across different maturities in a given interval, perhaps by month
plots the yields or interest rates of bonds that have equal credit quality but different maturity dates
the slope of the curve predicts the direction of interest rates and the economic expansion or contraction that could result

is a benchmark for other debts in the market, such as mortgage rates and bank lending rates
some investors use it to make investment decisions based on the likely direction of bond rates

Types of Yield Curves

shows low yields for shorter-maturity bonds, increasing for bonds with a longer maturity
the curve slopes upward, indicating that yields on longer-term bonds continue to rise, responding to periods of economic expansion
some bond investors will use a roll-down return strategy and sell a bond as it moves toward its maturity date
- “riding the curve”
- works in a stable rate environment as the bond’s yield falls and the price rises
- investors hope to capture profit from the rise in bond prices

slopes downward with short-term interest rates exceeding long-term ones
(is rare) appears during recessions, when investors expect long-term bond yields to drop
- investors seeking safe investments in an economic downturn tend to choose longer-dated bonds over short-dated ones, bidding up the price of longer bonds and driving down their yield

shows similar yields across all maturities, implying economic uncertainty
a few intermediate maturities may have slightly higher yields that cause a slight hump to appear along the flat curve
- these humps are usually for mid-term maturities of six months to two years
in times of uncertainty, investors demand similar yields across all maturities

allows for the comparison of the yields of short-term treasury bills and the yields of long-term treasury notes and bonds
shows the relationship between the interest rates and the maturities of US Treasury fixed-income securities

refers to the adverse effect of a shift in interest rates on the returns from fixed-income instruments like bonds
stems from the fact that bond prices and interest rates have an inverse relationship to each other
- price of bonds in secondary market decrease when market interest rates increase and vice versa

eg. an investor might move their money into defensive assets that traditionally do well during a recession if the bond yield curve indicates an economic slowdown
- might avoid long-term bonds with a yield that will erode against increase prices if the yield curve becomes steep, suggesting future inflation