Yield curves are often used as an economic bellwether, which can be both confusing and alarming for the average investor. Just remember the yield curve is an indicator, not a prediction. Treating the yield curve as a single piece of information, rather than taking it as an infallible forecast about the economy as a whole, will help investors to make the best decisions for their investments. Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors.
Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.
Select Region. United States. United Kingdom. Emily Guy Birken, Benjamin Curry. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
Understanding the Yield Curve You can plot a yield curve for any kind of bond, from corporate bonds to municipal bonds. How the Yield Curve Works A yield curve offers an easy-to-understand visual snapshot of a given bond market at a single moment in time. Normal Yield Curve A normal yield curve slopes up and to the right as yields increase with maturity. Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article.
Thank You for your feedback! Something went wrong. The U. Treasury building is seen in Washington, September 29, Money managers and economists often view a shrinking of the gap between yields on shorter-term Treasuries and those maturing out years - known as yield curve flattening - as a sign of worries over economic growth and uncertainty about monetary policy.
Here's a quick primer explaining what a flat yield curve is and how it may reflect investor expectations. Treasury finances federal government budget obligations by issuing various forms of debt. People often talk about interest rates as though all rates behave in the same way. The reality, however, is much more complex, with rates on various bonds often behaving quite differently from one another, depending on their maturity. A yield curve is a way to easily visualize this difference; it's a graphical representation of the yields available for bonds of equal credit quality and different maturity dates.
A yield curve is a way to measure bond investors' feelings about risk, and can have a tremendous impact on the returns you receive on your investments. And if you understand how it works and how to interpret it, a yield curve can even be used to help gauge the direction of the economy.
Most often the universe of bonds represented by a particular yield curve is limited by bond type—the one you'll probably hear referred to most often as "the yield curve" reflects the short, intermediate, and long-term rates of US Treasury securities.
The Treasury yield curve is often referred to as a proxy for investor sentiment on the direction of the economy. A yield curve can refer to other types of bonds, though, such as the AAA Municipal yield curve, or reflect the narrower universe of a particular issuer, such as the GE or IBM yield curve.
In general, short-term bonds carry lower yields to reflect the fact that an investor's money is at less risk. The thinking behind this is that the longer you commit funds, the more you should be rewarded for that commitment, or rewarded for the risk you take that the borrower may not pay you back.
This is reflected in the normal yield curve, which slopes upward from left to right on the graph as maturities lengthen and yields rise. You'll generally see this type of yield curve when bond investors expect the economy to grow at a normal pace, without significant changes in the rate of inflation or major interruptions in available credit.
There are times, however, when the curve's shape deviates, signaling potential turning points in the economy. Since , a normal yield curve has yields on year Treasury bonds typically 2.
When this "spread" gets wider than that—causing the slope of the yield curve to steepen—long-term bond investors are sending a message about what they think of economic growth and inflation.
A steep yield curve is generally found at the beginning of a period of economic expansion. At that point, economic stagnation will have depressed short-term interest rates, which were likely lowered by the Fed as a way to stimulate the economy.
The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main shapes of yield curve shapes: normal upward sloping curve , inverted downward sloping curve , and flat. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is used to predict changes in economic output and growth. The most frequently reported yield curve compares the three-month, two-year, five-year, year, and year U.
Treasury debt. Yield curve rates are usually available at the Treasury's interest rate websites by p. ET each trading day. A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time.
An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of an upcoming recession. In a flat or humped yield curve, the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. A normal or up-sloped yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of economic expansion.
A normal yield curve thus starts with low yields for shorter-maturity bonds and then increases for bonds with longer maturity, sloping upwards. This is the most common type of yield curve as longer-maturity bonds usually have a higher yield to maturity than shorter-term bonds. When these points are connected on a graph, they exhibit a shape of a normal yield curve. A normal yield curve implies stable economic conditions and should prevail throughout a normal economic cycle.
A steep yield curve implies strong economic growth in the future—conditions that are often accompanied by higher inflation, which can result in higher interest rates. An inverted yield curve instead slopes downward and means that short-term interest rates exceed long-term rates.
Such a yield curve corresponds to periods of economic recession, where investors expect yields on longer-maturity bonds to become even lower in the future. Moreover, in an economic downturn, investors seeking safe investments tend to purchase these longer-dated bonds over short-dated bonds, bidding up the price of longer bonds driving down their yield.
An inverted yield curve is rare but is strongly suggestive of a severe economic slowdown.
0コメント