Explaining Yield Curves

The Yield Curve is very similar to the term structure except that it is based on coupon bond yields whereas the term structure is based on only pure discount bonds. In looking at the current Yield Curve we can see that the general shape is that of an upward-sloping structure. In relation to anticipated future inflation this curve indicates that inflation is expected increase which is evident by the increasing size of the inflation premium wedge that is causing the overall curve to slope upward. In addition to this the risk premium, which is added on to the real rate to compensate investors for bearing a rate risk, is also increasing thereby continuously pushing the curve upward and causing increasingly larger discrepancies between the real and nominal rates. Though the real rate will remain unchanged regardless of these factors we can note in this situation that there is both a fear of inflation as well as rate instability. Conversely, in the downward-sloping structure, both the risk premium and inflation premium will be on the decrease.

The FINRA TRACE shows a similar upward-sloping structure for corporate bonds as well which would indicate that there is fear of inflation and instability in that market as well. There is a slight difference here as the curve for corporate bonds has a sharper rate of increase (upward slope) between the 10 and 20 year maturity intervals. Likewise, Municipal bonds and CD’s are on a similar slope.

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Current_Yield_Tables.docx
The yield curve is a graphical depiction of the interest rates (yields) available for bonds with different maturity dates. The US Treasury yield curve shows the short, intermediate and long term rates of US Treasury securities and can typically give an idea of the direction of the economy. The yield curve is dynamic, changing on a daily basis. Since Treasury bonds are backed by the US government, yields typically are low since they have less risk associated with them. This allows the US