The yield curve is the line that shows determined interest rates of bonds with different maturity levels but with equal credit. Often, it is reported to compare set periods such as six months, two years, and three decades. As it is the best indicator of a change in the market, it’s best to have an extensive understanding on it. So, to dish you some info, here’s more on the topic.
Shape of the Yield Curve
On a graph, the yield curve is usually sloping asymptotically. It goes in the direction that’s either upward or downward depending on factors including the maturity of bonds and marginal increases. Mainly though, it is influenced by the laws of supply and demand and tends to move continually to reflect the market’s state.
Three Types of the Yield Curve
- Flat Curve
A flat curve means that there is no movement and it’s due to there not being a clear projection of the trend. If you spot it, you are given a hint that investors along with other matters on the market are uncertain with how their short-term trades will end.
- Inverted Curve
If it’s apparent that there won’t be a break from losses later on and that things will just get worse, an inverted curve is shown. This signals investors to sell their interest rates and use the money they acquired from it for securities.
- Steep Curve
With a steep curve on a graph, there are a number of indicators that indicate that the economy will improve drastically. Having this on a graph is a good thing especially to investors who are looking to put in more money in the industry.
The Yield Elbow
On the yield curve, it is the point that suggests that the highest interest rates have been achieved. More importantly, it is a representation of the time to realize the maximum return of various kinds of investments. Because of what it shows, investors feel less reluctant to take risks during a particular period.
The Segmented Market Hypothesis
A theory concerning the yield curve is the segmented market theory. This is the argument that explains that any financial group is not substitutable. For instance, it is you, the investor, who affect the flow of prices in the forex industry the most.
Moreover, the segmented market hypothesis provides a discussion on the dependency of short-term and long-term markets on each other. According to it, the investor’s decision on what investments to make needs to be carefully thought-out.
Having an idea of what the yield curve is, its three types, and the yield elbow will help you make wiser investments in the forex market. The currency exchange rates may rise and fall but if you are familiar with the trend for a given season, you could predict outcomes. As a result, you get to bag more value for your money.
Source: Admiral Markets – فوركس, an Arabic forex broker.