The Yield curve

in #economy6 years ago (edited)

The Yield curve is, a curve on a graph in which the yield of fixed-interest securities(such as bonds) is plotted against the length of time they have to run to maturity.

The most important yield curve that investors need to pay attention to when they want to get a picture of how the economy is going, is treasury bond yield curve(Bank of England in UK).
Since bonds are a mechanism in which the governments borrow money from private companies and individuals, the government bond or treasury(a.k.a gilt in the UK) yield curve can be a way of observing what is the countries economical situation.

In simple terms a Yield curve represents the return of investment over time from giving your money to the government. It is important to notice that people invest in governments via the bonds market because the government always pays back.

When in the long term the market pays a higher interest rate we will see a sloped up/normal yield curve. The longer the time to maturity the higher the risk, therefore the yield is higher. This is considered a normal behaviour of the market.

But sometimes, when the government thinks that the economy is approaching a bubble or a recession and wants to prevent it, it will decide to pay less to the investor for the long term bond, therefore it will reduce the interest rates on the long term bond. In this situation we will see either a flat or an inverse yield curve.

One of the reasons why a Yield curve would invert is if there is a feeling that the borrowers are more likely to be able to pay a debt in 10 years than they are in 2 years the yield for the 2 year bond will be higher than the 10 year bond.
This can obviously be closely related to growth of the economy, but it is not a 100% relationship.

yield.jpg

Where to find information about current Yield curves:
Bank of England(UK)https://www.bankofengland.co.uk/statistics/yield-curves
Treasury(USA) https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Other sources
https://markets.ft.com/data/bonds
https://kbsonigara.wordpress.com/tag/humped-yield-curve/
http://www.worldgovernmentbonds.com/country/united-kingdom/
https://www.wnyc.org/story/money-talking-yield-curve-sign-future-recession/