The 澳洲幸运5官方开奖结果体彩网:Treasury yield curve, which is also known as 澳洲幸运5官方开奖结果体彩网:the term structure of inte🐽rest rates, draws out a 澳洲幸运5官方开奖结果体彩网:line chart to demonstrate a relationship between yields and maturities of on-the-run Treasury 澳洲幸运5官方开奖结果体彩网:fixed-income securities. It illustrates the yields of 澳洲幸运5官方开奖结果体彩网:Treasury securities at fixed maturities, viz. 1, 2, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. Therefore, they are commonly referred to as “constant maturity Treasury” rates or CMTs. 

Market participants pay very close attention to yield curves, as they are used in deriving interest rates (using 澳洲幸运5官方开奖结果体彩网:bootstrapping), which are in turn used as 澳洲幸运5官方开奖结果体彩网:discount rates for each payment to value Treasury securities. In addition to this, market participants are also interested in identifying the spread between 澳洲幸运5官方开奖结果体彩网:short-term rates and long-term rates to determine the slope of the 澳洲幸运5官方开奖结果体彩网:yield curve, which is a predictor of the economic situation of the country.

Yields on Treasury securities are in theory free of 澳洲幸运5官方开奖结果体彩网:credit risk and are often used as a benchmark to evaluate the relative worth of U.S. non-Treasury securities. Below is the 澳洲幸运5官方开奖结果体彩网:Treasury yield curve chart as on Oct. 3, 2014. 

Source:  

The above chart shows a "澳洲幸运5官方开奖结果体彩网:normal" yield curve, exhibiting an upward slope. This means that 澳洲幸运5官方开奖结果体彩网:30-year Treasury securities are offering the highest returns, while 1-mo🅠nth maturity Treasury securi𝓀ties are offering the lowest returns. The scenario is considered normal because investors are compensated for holding longer-term securities, which possess greater investment risks.

The spread between 2-year U.S. Treasury securities and 30-year U.S. Treasury securities defines the slope of the yield curve, which in this case is 256 澳洲幸运5官方开奖结果体彩网:basis points. (Note: There is no industry-wide accepted definition of the maturity used for the long end and the maturity used for the short end of thꩲe yield curve). The normal yield curve implies that both fiscal and monetary policies are currently expansionary and the economy is likely to expand in t༺he future.

The higher yields on longer-term maturity securities also mean that short-term rates are likely to increase in the future as growth in the economy would lead to higher 澳洲幸运5官方开奖结果体彩网:inflation rates. 

Other Shapes of the Yield Curve

1. 澳洲幸运5官方开奖结果体彩网:Inverted Yield Curve: This occurs when short-term rates are greater than long-term rates. It would generally imply that both 澳洲幸运5官方开奖结果体彩网:monetary and fiscal policies are currently restrictive in nature and the probability of the economy contracting in the future is high. The inverted yield curve has been considered a predictor of 澳洲幸运5官方开奖结果体彩网:recessions in the economy.
2. 澳洲幸运5官方开奖结果体彩网:Humped Yield Curve: This occurs when yields on medium-term U.S. Treasury securities are higher than the yields on long-term and short-term U.S. Treasury securities. This reflects that the current economic condition is unclear and that investors are uncertain about the economic scenario in the near future. It could also reflect that 澳洲幸运5官方开奖结果体彩网:monetary policy is expansionary and 澳洲幸运5官方开奖结果体彩网:fiscal policy is restrictive or vice-versa. 

The Bottom Line

It is imperative for market participants to view the yield curve to identify the 澳洲幸运5官方开奖结果体彩网:future state of the economy, which would help them make relevant economic decisions. The curve can easily be illustrated by 澳洲幸运5官方开奖结果体彩网:inputting current yields into an Excel sheet and creating a chart. Yield curves are also used to derive 澳洲幸运5官方开奖结果体彩网:yield to maturity (YTM) for particular issues and play a crucial role in credit modeling, including bootstrapping, 澳洲幸运5官方开奖结果体彩网:bond valuation, and risk and rating assessment.