Yield Curve Flashcards
What does a yield curve depict?
of rates over time with “risk” held constant
What determines the shape - Expectations of future interest rates?
If investors expect rising rates, the yield curve will slope upward If investors expect falling rates, the yield curve may slope downwards.
What are the 4 key Business cycles?
What does each cycle look like?
Expansion, Peak, Contraction, Trough Difficult to determine starting and ending points of each phase
What happens during Business Cycle Expansion?
- Gaining economic strength
- Increases in GDP
- Unemployment tends to decrease
- Pressure develops to increase interest rate
Yield curve typically is normal
Will begin to shift upward
Will also rotate as ST rates rise more than LT rates
What happens during the Business Cycle Peak?
- Economy is at full production (capacity)
- GDP may be growing at 3-3.5%
- Inflationary pressures
- Yield curve may be inverted
- ST rates > LT rates
- Borrowers will pay higher rate for ST rather than excessive LT rate for long time period
What happens during the Business Cycle Contraction?
- Production (GDP) slows
- Unemployment increases
- Inventory builds
- Interest rates begin to fall
- ST rates decrease more quickly than LT rates
- Bankruptcies increase
What happens during the Business Cycle Trough?
- GDP may have negative growth rate
- Rates continue to fall
- May require an economic shock
- Tax breaks
- Government spending
- Other economic stimulus