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The Basics of the Yield Curve |
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Written by Administrator
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Sunday, 29 July 2007 |
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Page 1 of 3 To a beginning investor, it always helps to expand your knowledge of financial terms and one that i've come across quite
frequently is "yield curve".
Often times, the term "Yield Curve" is mentioned in financial articles, and the phrase
"the yield curve is inverted so yadda-yadda-yadda" is thrown around back and forth.
The simple definition of what the yield curve is is the relationship between short and long-term
interest rates (or yields) of US Treasuries (bills and bonds) . When you graph the years to maturity vs. the yield (%), that is
what a yield curve is.
Just like CDs, normally the longer you loan out your hard earned dollars in treasuries,
the higher the return or interest rate should be when the treasuries mature. However, when
the yield curve is inverted, it means short-term treasuries have a higher rate
of return than long-term treasuries.
What It Predicts
- A normal looking yield curve is supposed to be a positive sign of the economy,
- An inverted yield curve is supposed to be a prediction of a recession and that interest rates will be lowered. The reason why an inverted yield curve is ominous is because a recession usually follows it most of the time, however not ALL the time.
- A flat curve in which all the treasuries have the same rate regardless of maturity date is a sign of uncertainty. It could either become a normal yield curve or an inverted one.
- A steep curve is when the long term treasuries yield 2% or more compared to the short term yields. For example, on average, a 20 year treasury yields 2% more than a 3 month bill. When the yield difference is greater than 2%, then it is a sign that the economy will do well.
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Last Updated ( Sunday, 29 July 2007 )
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