WHAT IS A BOND YIELD CURVE?
A bond yield curve effectively plots the interest rates paid to investors by bond issuers for different maturities. This applies to a range of bonds that have equal credit value but varying maturity dates.
We often come across ‘normal’ and ‘inverted’ yield curves.
Normal
A normal yield curve indicates the advantage of investing in a bond with a relatively longer maturity date. This form of curve is upward sloping. The majority of yield curves are upward sloping because investors demand a yield premium to lend money for longer periods of time, given the greater risk associated with this. Upward sloping yield curves also reflect investor expectations of steady economic growth.
Inverted:
An inverted yield curve is downward sloping, when short-term interest rates are higher than long-term interest rates. This is unusual but reflects an expectation that interests rates will be lower in the future, most likely as a result of a recession.
