Historical look at the treasury yield curve, Financial Management

The minimum interest rate which investors demand for non-treasury securities is represented by the yield offered on the treasury securities. This is why market participants monitor the treasury securities, especially the yield of on-the-run issues, on a continuous basis. Now, let us look into the relationship between the yield offered on on-the-run treasury securities and maturity.

 Shape of the Yield Curve

Historically, three types of yield curve shapes have been observed. The first is normal or positively sloped yield curve (figure 1). This is a yield curve in which an investor is rewarded with a higher yield for holding longer maturity Treasuries. The second type of curve is known as a flat yield curve(figure 2). In a flat yield curve, the yield doesn't vary with the maturity, i.e., it remains same for all maturities. The third and last type is inverted or negative sloped yield curve in which the longer the maturity the lower is the yield(figure 3).

Figure 1

125_shape of yield curve.png

Figure 2

1371_shape of yield curve1.png

Figure 3

1907_shape of yield curve2.png

Posted Date: 9/10/2012 3:20:03 AM | Location : United States

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