yield curve

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Yield curve


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 ?
Since last month, the yield curve flattened sharply, more than reversing the sharp gain in September.
The yield curve measures the relationship between bond maturities and bond yields.
The IRS has issued guidance on the methodology used to produce the corporate bond yield curve and segmented rates as part of enhanced pension funding rules for companies enacted by the Pension Protection Act of 2006.
Davis points out that a number of observers have expressed surprise that an inverted yield curve between long- and short-term interest rates would develop in the capital markets at a time when the economy did not appear to be in any immediate danger of tanking.
Yield curve modeling is used in the decision-making process of pricing and valuation in financial institutions.
short-term interest rates at extraordinary lows (at one point the Fed funds rate was set at 1 percent), financial institutions would borrow on the short end of the yield curve and buy the long end, guaranteeing a nice profit even before taking any risk.
Equity-market volatility and a sloping fixed-securities yield curve were primarily responsible for the surge in fixed-annuity sales, said Brad Powell, president of Jackson National Life Insurance Co.
By moving this structural cash balance farther out the yield curve, to an average maturity of two years and a maximum maturity of three years for any single issue, the benefit of an upward-sloping yield curve and wider credit spreads will accrue.
But, if there is anything like a window onto the future, it's the yield curve, something that makes bond investing more understandable as well as predictable.
OKLAHOMA CITY, June 7 /PRNewswire/ -- BONDTRAC, a computerized municipal bond offering system, allows subscribers to precisely evaluate municipal bonds at a glance with its Dynamic Yield Curve feature.
Fund companies have responded by creating myriad new products, up and down the yield curve, to meet the needs of virtually every investor.