Relationship between yield and maturity of a bond.
Interest Rate Changes
The government can change the federal funds rate, which influences the y-intercept of the yield curve:
- Inflation ⇒ interest rate ↑ ⇒ firm borrowing ↓ ⇒ investment ↓
- Recession ⇒ interest rate ↑ ⇒ firm borrowing ↑ ⇒ investment ↑
An inverted yield curve occurs as the bond market:
expects a recession ⇒ expectes the government to increase the interest rate ⇒ long-maturity bonds are more appealing.
Making Money off Bonds
Credit Curves
- Government bonds have the highest credit rating
- When comparing other types of bonds (e.g. corporate bonds), any bond with the same maturity has a higher yield than government bonds.
- Spread is the difference in yield between it and government bonds.
- Spread 1/Credit maturity, and is related to industry
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