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Yield Curve Essay

1797 words - 8 pages

1. What is plotted on the yield curve? Be specific about the X and Y axes. Be specific about which securities' yields are plotted on a yield curve.Answer:U.S. Treasury Yield CurveA yield curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at a given point in time. Yield curves are used to compare yields of different securities, to benchmark rates and to discover yield curve aberrations.A yield curve is a chart that graphically depicts the yields of different maturity bonds of the same credit quality and type. Yield is depicted on the vertical axis and maturity on the horizontal axis.X axes is term to maturity. For example, 30y ...view middle of the document...

In this situation, longer term bonds yields are higher than shorter term rates.Decreasing yield curves:Descending Yield Curve This shape shows that short term interest rates are higher than long term rates. This shape is often seen when the market expects interest rates to fall.Decreasing yield curve explanation depends on the distant future being more uncertain than the near future, and risk of future adverse events (such as default and higher short-terminterest rates) being higher than the chance of future positive events (such as lower short-term interest rates). In this situation, short term yield rates are higher than longer term rates.Flat yield curve:Flat Yield Curve Short term rates are the same as long term rates.Just as the first question's graph, the 2 Year 4.17, 3 Year 4.19, 5 Year 4.22, 10 Year 4.36, 30 Year 4.58, the long term bonds yields are almost equal to short term bonds yields, therefore we can see a flat curve.An inverted curve, in which short maturities yield more than their longer-dated peers, is a rare phenomenon that historically has been seen as a harbinger of a slowing economy. In this situation, the short maturities yield more than their longer-dated peers.3. John Devine, Chief Financial Officer for General Motors says that a flattening yield curve is "never good for the economic outlook". According to the feature article, what does a flattening or inverted yield curve suggest for the economy?Answer:With longer maturities, more catastrophic events might occur that may impact the investment, hence the need for a risk premium. This explanation depends on the distant future being more uncertain than the near future, and risk of future adverse events (such as default and higher short-term interest rates) being higher than the chance of future positive events (such as lower short-term interest rates). The flattening or inverted yield curve is means that the prospect of economy is uncertain. The investors can not know whether the high oil price will spark the inflation and cause the recession, and whether the Fed will continue to increase the rate, and whether this tightening policy will hamper the economy. All this ambiguity situation make John Devine unoptimistic.4. The feature article refers to the Federal Reserve's "tightening" policy that helped invert the yield curve in 2000. What generally are actions taken by the Fed that is associated with a "tightening" policy?Answer:The Fed increases its rate steadily and this situation pushed the two-year yield higher, while the 10-year yield has been capped by a still-benign inflation outlook and widespread support for long-dated Treasury debt from pension funds, foreign investors and central banks. As oil prices test new heights, the Fed is worried about the inflation, and the central bank is adoptinga tough stance on pre-empting any inflation that may stem from high oil prices. So in the recent meeting of the Fed, its members felt they could continue raising short-term...

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