Question

The following figure shows the yield curve on November 11, 2006. Your mother asks you to explain this yield curve. She suspects something is wrong but is not sure. What do you tell her? And what explanations do you have for why her suspicions are right?

Figure: The Yield Curve, November 11, 2006

    

Answer 1

The yield curve is what economists use to capture the overall movement of interest rates.It shows interest rates on U.S treasury debt at different maturities at a given point in time . The curve shows the relation between interest rates & time of maturity for debt given to the borrowers for a time peroid .Here short term debts instruments have a lower yield then long term debt instrument of the same credit quality .This gives the yield curve an upward slope & that is called positive yield curve. As it helps in measure of bond investors feelings about risks & can have a tremendous impact on the return you receive on investment, if we understand how to interpret it yield curve can also be used to mark direction of economy.

The mother must be enquring about the negative inversion of the yield curve in 2006 & she is not wrong because U.S economy was about to experience recession which gave a great down fall for wealth & revenue in the goverment funds which almost degraded the values of interests rates which further incresed the debt ratios , financial crisis & if a yield is negative it shows long term debt instruments , lower yields .

So , i would tell her that she there is a big theory behind the yield because the economy was about to decline after 2006 with heavy fall in demand graphs & increase in prices of utility factor ratios pf food & other basic needs in the financial market of U.S economy .

For suspicions i could explain to her that because there was no bad economic background since long before the 2007 rcession neither in the GDP nor in the population literacy rate but it was the US economy preparation for the doomsday for which maximum reserves & provisions were accumulated back then there wont be a chance for increase in graph as the recession seemed to be unavoidable in most of cases.