Hi, Cameron here. Today I'm going to write a post about the yield curve, and explain it in a macroeconomic context.
I'll start by saying that college hasn't taught me much if anything about the curve. In fact, while it has been mentioned, it was little more than a picture in an otherwise long chapter about discounting the present value of bonds. Pretty absurd to skip over something so important for something so easy to do and understand. Funny that this is how McCombs School of Business prefers to teach.
There are three types of yield curves, which represent the differences in return for short term and long term bonds. For a quick fact check, "yield" means interest rate. Higher yield means higher interest rate and more money to be made for those investing in the bonds.
Normal (upward sloping) : Picture this like an exponential upward sloping graph. This means that bonds with shorter maturities (time until they are paid) have lower value than bonds with longer maturities. This makes sense, as you'd expect to return more money in return for locking up your money for a longer period of time. This usually indicates a healthy growing economy.
Flat Yield Curve- This is as it sounds, flat. Short term bonds are yielding the same amount of return as long term bonds. This is actually something we are potentially faced with in the economy. In can be a sign of economic slowdown, as interest rates are rising and more people are looking to long term bonds (thus increasing demand and lowering their yields) for stability. This money comes out of the stock market.
3.Inverted Yield Curve - This is very rare, and happens when long term bonds are yielding less than short term bonds. While this can happen for a number of reasons, it implies a great deal of skepticism in the economy, and recession is likely to be present, or follow.
I hope this was helpful. As usual, please feel free to ask any questions, I'd love to answer them.