Question

Identify the different types of yield curves and explain what they indicate for the U.S economy? What is the current shape of the yield curve and why is it shaped that way?

Answer 1

1) Upward sloped curve or normal: In this the long term bonds have higher yield as compared to short term bonds. This is because market considers long term bond to be more risky than short term bonds.Long term bonds might have default and interest rate risk.This is an indicator of boom or expansion in market.

2)Downward sloped curve or Inverted sloped:: In this the short term bonds have higher yield as compared to long term term bonds. There might be higher demand of long term bonds over short term bonds.This is an indicator of recession in market.

3) Humped Yield Curve. In this medium term bonds have higher yields than short term and long term bonds. These are bell shaped curves and it indicates volatility in the system.

The currency yield curve is inverted. This is shaped in such a way because of global factors like trade wars, Brexit,etc. It is shaped in such a way because short term bonds are riskier than long term bonds.