The Yield Curve graphs the Government Bonds’ annualised yield to maturity, plotted on the Y-Axis. On the X-Axis is the term to maturity for these Bonds, issued by the same insurer under the same Credit Rating.
To understand the Yield Curve, understand that the X-Axis (horizontal) plots Maturity and the Y-Axis (vertical) plots Yield. Or, more accurately, the annualised yield to maturity, which changes and brings the different shapes to the Yield Curve, Normal, Flat and Inverted. The graph sloping up from Left to Right is a Normal Yield Curve representing the normal Term Structure of Interest Rates. The Yield Curve plots the Bonds issued by the same Issuer. For example, the U.S. Government under its Credit Rating. The range of maturities plotted on the X-Axis extends from Short-Term under 2 Years, then 2 Year to 10 to 30 Year Long-Term Bonds. Then the different yields, are plotted on the Y-Axis and the yields are constantly changing driven by market forces.
The domestic Yield Curve provides a benchmark rate for all other Debt instruments in the Economy. Thus, in the U.S. the Yield Curve for U.S. Treasuries will guide the pricing for all other Debt Securities or offerings such as Mortgage Bonds, Corporate Bonds, Variable Rate Mortgages and Bank Loans. The Yield Curve will be used to forecast changes in the Economic Cycle, from growth to the peak to slowdown to recession. The pricing of Home Loans is also determined by the Yield Curve, thus becomes an instrument to implement Monetary Policy and Mortgage repayments are a major outflow of the Household budget. Short-Term rates will be raised or lowered by the Central Bank. Variable Mortgage rates are priced at the Short-End of the Yield Curve.
Fixed Rate Mortgages are priced from the Mid to Long End of the Yield Curve as Mortgages Bonds are issued to match the term of the Fixed Loan Mortgage. So, to put his into perspective, the Quantitative Easing programs (QE and QE2) implemented by the Central Banks impacted the Long-End of the Yield Curve, lowering the pricing of Fixed Mortgages. The Property Market is driven more by people’s ability to service a Loan rather than the price of a House. But we all think in terms of House Prices, thus QE and QE2 were a major factor in driving House Prices. The most frequently plotted debt maturities on the X-Axis of the Yield Curve are 3-months, 2-year, 5-year, 10-year and 30-year.
Meet the author behind Smartest-Data. Warren William has a career in Finance and Investments extending over 35 years, both on the Buy Side and Sell Side. His most recent roles include, developing Institutional Risk Management Programs for managing Equity and Fixed Income Risk. Prior to this Warren William work in Alternative Investments, in Investment Management and as a Buy Side Equity Analyst. Warren William brings a wealth of knowledge and expertise to the table, providing in-depth analysis and commentary on the latest trends in the Stock Markets. Contact information: wwBLOG@smartest-data.blog or Telegram +393339034488
Welcome to Smartest-Data
Smartest Data aims to be your go-to source for analysis and commentary on Investments, Personal Finance and the Global Stock Markets. The aim is to provide our readers with insightful and actionable information for independent minded Investors. Dissecting the daily avalanche of Data produced by the Stocks Market by using data Websites and Apps available to people at home. Join us, to be Driven by Data to navigate the Investment universe markets and make better informed investment decisions.
