How To Plan Your Financial Future By Reading The Yield Curve

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When regular folks think of the economy and the market, the most enduring image that pops up is that of the hysteria in the stock market.

But those pictures of rejoicing and despair are just reactions. The real story lies in the larger, longer picture and this tale is a never-ending one.

We are talking about the bond market. So how does one get an idea of the ebbs and flows of the economy by looking at the slow-moving leviathan that is the bond?

Whether you are heading a start-up or planning to buy a new car, it is important to see what is around the corner and the best place to start is learning to read a simple yield curve.

How To Plan Your Financial Future By Reading The Yield Curve

What Exactly Is A Yield Curve?

The yield curve is a graphical representation that takes a look at the difference of yields or interest rates on short-maturity and long-maturity bonds. The direction of the curve can be used to point in the direction of the larger economy. Bonds that are short-term usually have smaller interest rates and longer maturity bonds have higher interest rates.

If this difference remains consistent, the economy is on a progressive and predictable path. The yield curve changes shape when short-term bonds start gaining on those with a longer maturity period. We will learn more about what the different scenarios mean below. The expert at can tell you more about yield curves if you are looking for more information.

Predicting economies with bond yield curves

Comparing short-term and long-term interest rates over a long period of time gives us a fair idea of investor sentiment. Looking further, these sentiments provide an indication of what the market is going through.

How does your investment factor in? If you are planning to put your funds into something for good returns, make sure that you are not blind to what the yield curve shows. Short-term interest rates are used as a tool for market control by the Federal Reserve. The long-term bonds are more exposed to the various cycles of the economy and hence are usually associated with higher interests.

Where Is Our Economy Headed? – Read The Yield Curves

Predicting the future – that is something we all wish we could when it concerns our money. The yield curve is not a magic crystal but there are certain market trends it can point at. For your financial security’s sake, it is important that you understand the four types of curves and what they can mean to the economy and to you.

1. Normal Curve

A normal curve – a gradual upward slope – is something that suggests an ideal and controlled situation – interest rates or yields increase with the duration of maturity. In other words, there is confidence in the long-term prospects of the economy and it bodes well if you are putting your money in something that has a long maturity period.

This stability makes it easier for you to plan your finances and you do not have to make a conservative approach because the economy is considered healthy. Sometimes the curve can get a little steep, suggesting that the interest rates are continuously rising with the longer maturity. This is the sign of a growing economy and that can mean very high gains on your long-term investments.

2. Flat Yield Curve

The flat yield curve is usually experienced during economic transition. It is characterized by similar interest rates across different points of the maturity period – basically, there is not much of a difference in yields between short-maturity and long-maturity bonds.

This is not a good sign if it is showing up during a period of growth as it suggests that investors are losing their enthusiasm about the longer maturities and this would discourage investment and slow down the economy. Lending gets affected – it will be relatively difficult for you to get a loan because there is no incentive on the bank’s end.

3. Inverted Curve

An inverted curve is a prospect that nobody likes since it points at a recession. Rational borrowing comes to a standstill. The housing crash of the last decade can be represented in an inverted yield curve. Recessions are inevitable and it is all about reducing the effects and recovering as quickly as possible. Understanding yield curves will help you stay alert and focus on saving money when the time comes.

What we have learned from this introduction to yield curves is that the economy has a way of correcting itself and in our lifetimes we will experience its many cycles. Your job is to stay informed and to start understanding the nuances of investments, stocks, bonds, and the connecting framework.

We cannot all be experts on the economy but let us not forget that it is our money too. Be responsible – plan your investments according to solid data and expansive data. Secure your future and your family’s too.