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