yield curve

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Yield curve

The graphic depiction of the relationship between the yield on bonds of the same credit quality but different maturities. Related: Term structure of interest rates. Harvey (1991) finds that the inversions of the yield curve (short-term rates greater than long term rates) have preceded the last five US recessions. The yield curve can accurately forecast the turning points of the business cycle.

Yield Curve

A representation on a chart of the yields on bonds with identical credit ratings but different maturities. On the yield curve, the maturities are represented on the x-axis, and the yield is represented on the y-axis. That is, if the yield curve trends upward, it indicates that interest rates for long-term debt securities are higher than short-term debt securities; this is called a normal yield curve. A negative yield curve indicates that interest rates for short-term debt securities are higher, and a flat yield curve indicates that they are roughly the same. Yield curves are most commonly plotted with U.S. Treasuries with different maturities; this is used to predict future trends in interest rates.

yield curve

At any particular time, the relation between bond yields and maturity lengths. The yield curve usually has a positive slope because yields on long-term bonds generally exceed yields on short-term bonds. The shape of a yield curve is influenced by a number of factors including the relative riskiness between long-term and short-term securities and by investors' expectations as to the level of future interest rates. Also called term structure of interest rates. See also expectations hypothesis, flat yield curve, negative yield curve, positive yield curve, riding the yield curve.
Case Study Long-term interest rates are generally higher than short-term rates, resulting in a yield curve that slopes upward. An upward-sloping yield curve was in place in fall 2001 when six-month Treasury bills were yielding 2% at the same time that 30-year Treasury bonds were selling to yield slightly over 5%. Despite the relatively steep slope of the curve, many bond traders were convinced the slope would grow even steeper. That is, they believed short-term interest rates would continue to fall at the same time long-term rates remained steady or moved upward. The Federal Reserve was actively pursuing an easy money policy to stimulate a weakening economy. The September 11 terrorist attacks on the World Trade Center and Pentagon accelerated the economic decline with major corporate layoffs, reductions in industrial output, and increased business bankruptcies. The attack also made it likely that the U.S. Treasury would increase spending, thereby borrowing more and selling more Treasury bonds. The increased borrowing would result in higher long-term interest rates and reduced prices for Treasury bonds. At least, that was the theory. In this environment many bond traders decided to take an investment position that allowed them to profit from a steeper yield curve. Traders took a bullish position (bought) in short-term Treasuries they thought would increase in price, and at the same time they assumed a bearish position (sold) in long-term Treasuries they thought would decline in price. This investment strategy came tumbling down on October 31, when the U.S. Treasury made a surprise announcement that it would quit selling 30-year bonds. The announcement caused a major price increase in these bonds that in a two-day period reduced yields from 5.25% to about 4.8%. What seemed a sure thing among sophisticated investors turned into a nightmare as a bearish bet on long-term Treasuries went bad for a reason none of the participants had foreseen.

Yield curve.

A yield curve shows the relationship between the yields on short-term and long-term bonds of the same investment quality.

Since long-term yields are characteristically higher than short-term yields, a yield curve that confirms that expectation is described as positive. In contrast, a negative yield curve occurs when short-term yields are higher.

A flat or level yield curve occurs when the yields are substantially the same on bonds with varying terms.

A negative yield curve has generally been considered a warning sign that the economy is slowing and that a recession is likely.

yield curve

a line that traces the relationship between the rates of return on BONDS of different maturities. The slope of the line suggests whether INTEREST RATES are tending to rise or fall.
References in periodicals archive ?
Release date- 29082019 - After finding support from escalating trade tensions between the US and China, gold prices kept its upside movement on Wednesday as recession worries increased due to deepening inversion between short and long term US yield curves and then fell slightly due to stronger dollar and profit taking however these movements are seen as consolidation at these levels.
"The yield curves are all crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way."
Yield curves have now inverted in the US, in Australia, Canada, and a number of other advanced economies.
With pain fresh from the market downturn in the fourth quarter of 2018, it is understandable to be concerned and worried about what future markets may hold with what I have stated about inverted yield curves implying an impending recession.
The Bank of England's Jan Vlieghe has presented the argument that the unwinding of quantitative easing need not impact yield curves.
Yield curves contain a collection of data points, each of which is an interest rate for a given Treasury maturity and any of which can vary over time.
The San Francisco Fed's research department argues that every recession in the past sixty years has been preceded by an inverted yield curve. Inverted yield curves have telegraphed all nine recessions since 1955 with only one false positive, in the mid-1960s.
To understand why, we need to understand inverted yield curves, hear the nuances in what was possibly Janet Yellen's final testimony before Congress last week, and remember that the Fed doesn't have to raise rates to tighten monetary conditions.
Some economists, he points out, try to "prove" recessions result from negative yield curves. They point to the recessions of 1991, 2000, and 2007-2009 as coinciding with flat yield curves between three-month Treasury Bills and 10-year Treasuries.
The bottom line is that yield curves contain important information for business cycle analysis, but like other indicators, should be interpreted with caution.
Our lead article shows how yield curves can help economists understand such events as the global financial crisis.