Yield curves: a primer

As we order spot yields to maturity of a combination of bonds by their maturity, we create yield curve. The yield curve is generally visualised as a graph with the time to maturity and yields on the axes. The curve has many implications in modern financial markets and are frequently subject of news reportings.

In this article we introduce yield curves

Typical representation of the yield curve

The bonds are normally grouped by their credit rating and issuing party. Yield curves may therefore be observed for either governments, mortgage issuers or corporations with uniform credit ratings.

Explaining the positive slope

In most examples of the yield curve, we typically observe upwards slopes as a function of time to maturity. But why is this? Theory describes three main explanations:

  • Liquidity preference theory
  • Expectations theory
  • Market segmentation theory

Negative yields

As of today (2019), many countries write negative interest rates on their bonds. If it wasn’t for the last decade or so, negative rates wouldn’t be fathomable by the majority of economists.

Reversing the curve: an indication of imminent recession?

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