When investing, understanding the yield curve helps investors gain and avoid losses.
Technically, the yield curve is a chart drawn at a set point in time.
The interest rate on the curve reflects the bond rate.
You can think of a bond as a loan.
Every loan involves two parties: the borrower and the lender.
Bondholders are lenders;
The issuer of the bond is the borrower.
Yield is the interest rate paid by the borrower (the bond issuer) to the bond holder (the lender).
Bonds are debt instruments that support short – and long-term maturities.
Maturity is the time before the full amount of interest promised by the creditor issuer is paid to the bondholder.
By plotting bond rates on a chart, the author hopes to explore the future trend OF bond rates.
With this information, decisions can be made on how to buy and sell to make a profit.
The most commonly reported yield curve compares three-month, two-year and 30-year Treasuries to each other.
The yield curve serves as a benchmark for bonds in other markets, including mortgage rates and bank lending rates.
The yield curve is also used to forecast economic output and growth.
There are three basic types of yield curves.
The first one is the ordinary yield curve.
The second is an inverted yield curve, and the last is a flat yield curve.
The general yield curve is downward sloping, indicating that the interest rate (yield) on short-term bonds is lower than the interest rate on long-term bonds.
This is because long-term bonds have to be considered and the risks associated with holding them for a long time.
The inverted yield curve has higher short-term rates than long-term rates.
In this case, the short-term market forecast is not optimistic.
An inverted yield curve usually expects a downturn in the near future.
A flat yield curve is also used to represent economic transitions.
Trends after the transition period depend on a number of factors.
Typically, a flat curve indicates that long-term interest rates will be equal to or very close to short-term rates.
That’s good for borrowers, especially those borrowing at variable rates.
For investors, that suggests buying long-term bonds won‘t pay much.
For the normal yield curve and the inverted yield curve, the slope also reflects the trend and volatility of the market.
If the slope of the ordinary yield is high, it indicates strong economic growth and low market volatility.
If the slope of the inverse yield is very high, it indicates a depressed economy and high market volatility.
How to use this information to learn about the yield curve can stimulate investor behavior and profitable investor decisions.
For example, on a “quiet” trading day when/currency pairs are depressed, bond yields can indicate whether you should take a long or short position.
Indeed, the yield curve can tell currency investors what to expect in the market.
But just looking at the yield curve doesn’t help.
Among them, currencies are traded in the form of currency pairs.
So traders need to watch the yield curve for both currencies.
In this case, the investor will examine the US and Japanese yield curves.
A sharp rise in the dollar yield curve and a flat yen yield would indicate a rise in USD/JPY.
If the trader trades on this information, he will make a profit by investing in USD/JPY.
The New Year will be the market holiday, the Fed is about to start trimming.
Please pay attention to the specific operation, the market is changing rapidly, investment needs to be cautious, the operation strategy is for reference only.
