Yield Curve

The yield curve is the graphical display of the relationship between several maturities of an investment instrument and the yields across these maturities at a set point in time. The yields are on the vertical axis and the maturities are on the horizontal axis. Yield curve types are: normal yield curve, inverted yield curve, flat yield curve and the bell-shaped yield curve which denotes high yield in the medium-term. Some common moves that can take place in  the yield curve over time are: “steeping” (in positively-sloped yield curves, a rise of the far end of the curve, or decline of the closest end of the curve or a steeper curve), “flattening” (in positively-sloped yield curves, a decline in the far end of the curve, a rise of the near end of the curve, or a decline in slope) and parallel shift, which is the shift of the entire yield curve upwards or downwards without changing its shape. A steeper curve reflects expectations that interest rates (inflation) will increase in the long run. A flatter curve, in other words, flattening of a positively-sloped yield curve (a rise in the curve close to the origin, a decline in the far side of the curve) denotes that investors tend to choose longer maturities to make use of the current interest rates as they expect interest rates to fall in the future. In turn, the yield in this maturity falls due to increase in demand, while those who demand funds prefer shorter maturities because they expect lower interest rates in the future, thereby increasing yield due to excess supply.

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* The views expressed here are those of the authors. They do not necessarily reflect the official views of the Central Bank of the Republic of Turkey.

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