The yield curve measures investors' expectations for future economic
activity. Usually, the yield curve slopes upwards as maturity
increases to reflect the increased risk associated with longer
maturities.
A flat yield curve typically indicates that an economic slowdown,
accompanied by lower interest rates, is expected.
A good description of what different yield curve shapes typically
indicate about the economy is found at:
"Historical Yield Curve" Fidelity Investments
http://fixedincome.fidelity.com/fi/FIHistoricalYield
The web page also includes a "living" yield curve that provides
historical yield curves from March 1977 to October 2004.
Sincerely,
Wonko |
Request for Answer Clarification by
salevene-ga
on
04 Feb 2005 17:31 PST
Wonko,
Great response! I have a further question if anyone wants to ponder
this with me. The website on yield curves states that a flattened
curve represents a potential slowdown in the economy, accompanied by
lower short-term rates. However, short-term rates are on the rise,
the 10yr hasn't moved, and the curve appears to be flattening.
However (yes, again), it seems the economy is on a roll; the market is
slowly rising and mergers and acquisitons are through the roof.
Anyone care to expand or comment on this??
Thanks
|
Clarification of Answer by
wonko-ga
on
04 Feb 2005 17:43 PST
From my perspective, there are a variety of factors that suggests that
the current economy will slow. First of all, the Federal Reserve is
raising interest rates in hopes of slowing the economy so that
inflation does not take hold. Second, we have a large and growing
trade deficit, which means that the domestic economy is less active
producing things. Foreign competition is also keeping prices under
control. The flattening of the yield curve is indicative of investors'
belief that the Federal Reserve will keep inflation under control
through its rate increases. If that belief changes, and the economy
begins to overheat, the yield curve will steepen.
Sincerely,
Wonko
|
