The normal yield curve
Throughout the broader scheme of things, finance, economists, investors, market observers, and others are involved in deciding whether interest rates for bonds will adjust depending on various maturities. While no one can predict the future, the yield curves help to understand the trends.
The normal yield curve
Normal yield curves indicate that bonds with longer maturity have higher interest rates than short-term ones because the long-range risk of keeping bonds, such as inflation, requires higher income. Bondholders signalize their expectations of continued economic growth without significant interruptions and can make long-term funds.
Inverted curve
Inverted yield curves are indicators of higher returns for short-term bonds as investors worry about the near-term future and therefore need higher earnings to retain the short-term investment. Lower rates appear to mean less economic growth, and an inverted return curve may suggest that there’s a recession.
Steep yield curve
A steep performance curve is the one in which the short-term outcomes are common but with higher long-term outcomes. The curve suggests that future interest rates will increase.
Flat curve shows that both short-and long-term returns are on similar rates, which means that the economy is going from growth to recession or recession to growth during a transitional era. In the former, short-term returns increase, and long-term returns decrease, while the latter is the opposite.
Question 2
In the market cycle boom, fewer companies go into bankruptcy, and lower co-bond default risk reduces the risk premium. Similarly, corporate bonds ‘ default rates increase, and threats are compounded during a recession. The corporate risk premium thus increases anticyclical during a recession and falls at boom.
Question 3
If yield curves were flat on average, it would be preferable to embrace the theory of expectations because it implies that the longer-term risk compared to the short-term is null. Additionally, the liquidity premium will show that the market expects an early fall in short-rates and a sustained moderate fall in the future.