Glimpse the Future with the Yield Curve
While there is no definitive method of predicting the economic future, the yield curve provides fact-based clues that can help guide investment choices. And here are several questions and answers that will help you better understand how to apply the yield curve to your own investment strategy.
What is the yield curve?
The yield curve is a graphic representation of the interest rate movements of U.S. Treasury bonds of various maturities. While the rates on bonds of different maturities move independently - even in opposite directions - the curve itself depicts an overall pattern of rate movement in a single composite. And the type of curve can be an indicator of the future expansion of, or contraction in, the U.S. economy.
What types of curves are there?
1. A "normal" curve, which occurs whenever long-term rates are higher than short-term rates. This generally indicates that the Fed will be friendly toward the markets, with a steeper curve indicating economic expansion.
2. A "flat" curve, which occurs when all maturities have the same yields. This can be a predictor of an economic transition, signaling a move into or out of a recession.
3. An "inverted" curve, which occurs when short-term rates move higher than long-term rates. This often means the Fed is intentionally slowing the economy, and that investors feel interest rates will eventually move lower. A steeper inversion often accurately indicates a greater risk of recession. In fact, eight of the nine most recent bear markets occurred along with or shortly after a yield-curve inversion.
How can you use the yield curve?
If you invest in bonds, the curve can help you determine which maturities may be right for you. If you hold credit card debt or an adjustable rate mortgage, the curve can help you determine if you should consider changes in how you manage that debt. And because of its depiction of the potential expansion or contraction of the U.S. economy and financial markets, the yield curve can also help you decide how much to weight your portfolio toward U.S. equities.
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What is the yield curve?
The yield curve is a graphic representation of the interest rate movements of U.S. Treasury bonds of various maturities. While the rates on bonds of different maturities move independently - even in opposite directions - the curve itself depicts an overall pattern of rate movement in a single composite. And the type of curve can be an indicator of the future expansion of, or contraction in, the U.S. economy.
What types of curves are there?
1. A "normal" curve, which occurs whenever long-term rates are higher than short-term rates. This generally indicates that the Fed will be friendly toward the markets, with a steeper curve indicating economic expansion.
2. A "flat" curve, which occurs when all maturities have the same yields. This can be a predictor of an economic transition, signaling a move into or out of a recession.
3. An "inverted" curve, which occurs when short-term rates move higher than long-term rates. This often means the Fed is intentionally slowing the economy, and that investors feel interest rates will eventually move lower. A steeper inversion often accurately indicates a greater risk of recession. In fact, eight of the nine most recent bear markets occurred along with or shortly after a yield-curve inversion.
How can you use the yield curve?
If you invest in bonds, the curve can help you determine which maturities may be right for you. If you hold credit card debt or an adjustable rate mortgage, the curve can help you determine if you should consider changes in how you manage that debt. And because of its depiction of the potential expansion or contraction of the U.S. economy and financial markets, the yield curve can also help you decide how much to weight your portfolio toward U.S. equities.
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posted by Bob Moser at
1:55 PM
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