More and more commentators in the press have been talking about the "yield curve" for the last year, but how much do you know about its significance? This is a good indicator to be aware of, so today's article will be about the US Treasury Bond Yield Curve.
The basic idea is that if the yield curve is "normal," the rates for the different US Treasury Bonds should appear to be a function of their time scale. Meaning, shorter bonds (i.e. 13 week bonds) should yield a lower percentage rate then longer bonds (i.e. 30 year bonds) by 2-3% at least. The idea is that you should be rewarded with a higher percentage rate for buying a longer term bond.
Treasury bond rates change on a daily basis independent of each other. They are separate entities but move together, most of the time. What people worry about is a "flat" or "inverted" yield curve. This happens when the yields of the all bonds become almost the same or if the yields of the shorter-term bonds move higher then the longer-term bonds. The inverted yield curve has been linked with periods of slowing growth in the economy and downturns in the stock market. Currently we are getting close to having a flat yield curve but it is uncertain whether it will become inverted or return to normal.
The chart below shows the current yield curve (blue) and a more "normal" curve (red) from two years ago.
David J. Kosmider is the President and cofounder of TimingResearch.com which provides advice and recommendations to stock and options traders worldwide. View all of his articles and services here: http://www.timingresearch.com/
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