Glossary

# Yield curve

Category —
Analytical Metrics

A yield curve is a visual representation of the temporary structure of interest rates. The yield curve shows the dependence of the yield on financial instruments on their term. Using this tool, the investor gains insight into a number of market features of the traded bonds, and can also predict the potential behavior of the security price under the influence of market factors. The analysis of graphical and tabular data makes it possible to assess the current market situation, calculate the size of fair premiums and calculate bond prices with a predicted movement of interest rates, etc.

The X-axis represents the duration of the bond, and the Y-axis shows the yield. Under normal economic conditions, the curve is a monotonically upward increasing convex curve, since there is a direct relationship between yield and duration: the longer the duration, the greater the yield. This fact can be explained due to the presence of the time value of money and an increase in risk with an increase in the term. Any investor who loses their money for a longer period requires a higher rate. Moreover, in normal situations, the yield curve has a horizontal asymptote, since the yield does not grow indefinitely, the rate of change in yield decreases with increasing term and tends to zero.

Sometimes the markets are under pressure due to various adverse factors, and the yield curve changes its usual way, reflecting these changes. If the rates on long-term bonds are equal to rates on short-term bonds, then the curve will be flat. If long-term bond yields fall below short-term issues, the curve is inverted. This could signal a negative state of the economy and an impending recession. Analysts also study the difference between short and long bond yields. For example, you can subtract the yield on 2-year securities from the yield on 10-year bonds and get a time spread that shows the slope of the curve. If the spread narrows, the slope of the curve tends to become flat.

The yield curve can be built for any issuer, but most often the yield curves for sovereign bonds are analyzed. A market map with points of specific issues (also in the yield / duration axes) can be compared to the yield curve. Studying the scatter of points of specific issues relative to the curve, you can find issues that are more attractive for investment (they will lie above the curve).

The values of the yield curves on the Cbonds website can be viewed in the section "Indices" - "Yield curves and spreads". For example, USA Yield Curve Index. The curves themselves are available in the Cbonds mobile application in the "Interest rates" section.

The X-axis represents the duration of the bond, and the Y-axis shows the yield. Under normal economic conditions, the curve is a monotonically upward increasing convex curve, since there is a direct relationship between yield and duration: the longer the duration, the greater the yield. This fact can be explained due to the presence of the time value of money and an increase in risk with an increase in the term. Any investor who loses their money for a longer period requires a higher rate. Moreover, in normal situations, the yield curve has a horizontal asymptote, since the yield does not grow indefinitely, the rate of change in yield decreases with increasing term and tends to zero.

Sometimes the markets are under pressure due to various adverse factors, and the yield curve changes its usual way, reflecting these changes. If the rates on long-term bonds are equal to rates on short-term bonds, then the curve will be flat. If long-term bond yields fall below short-term issues, the curve is inverted. This could signal a negative state of the economy and an impending recession. Analysts also study the difference between short and long bond yields. For example, you can subtract the yield on 2-year securities from the yield on 10-year bonds and get a time spread that shows the slope of the curve. If the spread narrows, the slope of the curve tends to become flat.

The yield curve can be built for any issuer, but most often the yield curves for sovereign bonds are analyzed. A market map with points of specific issues (also in the yield / duration axes) can be compared to the yield curve. Studying the scatter of points of specific issues relative to the curve, you can find issues that are more attractive for investment (they will lie above the curve).

The values of the yield curves on the Cbonds website can be viewed in the section "Indices" - "Yield curves and spreads". For example, USA Yield Curve Index. The curves themselves are available in the Cbonds mobile application in the "Interest rates" section.