Yield curve

A yield curve is a set of bonds with different maturity and yield levels illustrated on the same chart.

As illustrated below, the horizontal axis (from left) represents the maturity period of the bonds, from the shortest to the longest term. Whereas the vertical axis (bottom to top) represents yields from low to high.

NORMAL Yield Curve

Under normal conditions, the market usually expects the economy to have stable growth, with no significant changes in inflation, so investors often expect higher returns to the market. longer-term.

However, in times of economic instability, especially in times of crisis, reversals occur, which means that short-term bonds often have higher yields than longer-term bonds. The reason is that during these periods, investors lack confidence and the economy, so they often demand a higher rate of return for their short-term investment and are willing to accept lower returns. long term.

Yields in a reversal curve

And yield curve inversion is often seen as an indicator of upcoming recessions.

For a more in-depth understanding of the sibling yield curve inversion, you can refer to this article again:
  • Everything about the ‘Reversal yield curve’ and why it predicts recessions!
Other types of yield curves

In addition to the two types of yield curves above, we also have two other types of yield curves including:

BETTER Yield Curve

This type of curve comes in a period when long-term bondholders expect the economy to improve rapidly in the future. Investors are concerned about being trapped in low yields so they demand higher returns in the long run.

The yield curve is FLAG

This type of curve appears during pre-recession or pre-economic boom.

In short, traders and investors around the world often observe closely the movements of the bond market as well as the changes in the yield curve, because, as mentioned, it is closely related to current economic status as well as future prospects, which in turn influences their trading/investment decisions.