Yield Curve analysis

The Yield Curve is a plot of treasury yields across the various maturities at a specific point in time. At the front (bottom left) of the yield curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the yield curve are Treasury Bonds with maturities of 20 and 30 years. In a normal yield curve, yields rise as the maturities increase. If the yield on shorter maturities is higher than that of longer maturities, then an inverted yield curve is said to exist. An inverted yield curve is a sign of tight money and is bearish for stocks. Note that an inverted yield curve occurred prior to the peak of the S&P 500 index in late 2000 (prior to the Dotcom Bust) and flat to inverted in 2007.

Category:

Education

Tags:

• finance
• yield curve
• investing
• interest rates
• stocks
• economics

[ish13ballack]

could someone explain why an inverted yield curve is bearish for stocks? Is it because people would rather buy the bonds than the stocks because you have less risk and higher returns?

[lordbinder]

the curve itself its not bearish. The yield curve when inverted shows that the perception of risk shifted, investor are thinking that short term has a higher risk than long term so the inverted yield curve is not a cause of bear stock market but a prediction due to the shift on risk perception

[stockonline2]

Sell Mortimer, sell!

[lordbinder]

jajajjaja lol

[ddt77ta]

hi do you have another example please?

the index on the right is the S&P?

The negative slope of the term structure

from 0.46'' to 0.48'' is it the sign of the bearish equity market?

Thx

[lordbinder]

yes is the sp500, and yes the negative slope of short term rates is the trigger, the inverse curve always trigger a bearish market

you can check an updated version on stockcharts searching for "dynamic yield curve"

[jamesarongray]

There was an analysis?

[lazyfreedom98]

Brilliant

Thanks

for the

Upload

[MatteNoob]

@lordbinder I guess what I'm trying to say is: If the government yanks up the interest rates for t-bills (do they decide this?) all other projects will be less profitable and in turn people will buy t-bills instead of investing in other projects making capital more expensive and then in turn give a recession.

[MatteNoob]

@lordbinder So the government has to pay higher interest on the t-bills because people want to stay in cash or other (more long term) investments or what? I saw a chart that showed that an inverted yield curve often comes before a recession. That seems to be a fair assumption as recessions are characterized by less investments, right? Also wouldn't high short term interest rates for t-bills make other projects less profitable due to the time value of money?

[ish13ballack]

oh ok thanks