A yield curve illustrates a line where rates of interest at a certain period, of bonds with equal quality in credit but varying dates of maturity. The yield curves are divided in three types depending on shapes and these are normal, flat (humped) and inverted. The normal yield curve expresses maturity bonds with longer time having a higher yield in comparison to the bonds which take shorter time but have higher risks due to time ( Melicher & Norton, 2013) . An inverted yield curve portrays the shorter-term yields which are higher when compared to the longer-term yield and it is an indication that there is a probability of recession taking place. The flat curve illustrates both short- and long-term yields are near each other. It is an economic transition predictor.
These curves illustrate different levels of the United States economy. They are able to show the risks which existed with short-term investments such as possible loss of money due to inflation. When the interest rates are high, savings will be reduced, more people will borrow from banks and the debt rates will go high ( Melicher & Norton, 2013) . Short-term yields will show the probability of recession taking place, with a slow growth in the economy, high unemployment levels, large amounts of debts. The curves guide economic policy makers on strategies of regulating the economy.
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The current yield curve in United States is inverted. The curve indicates that the longer-term bonds are expected to continue to fall. It has resulted in investors purchasing the longer-maturity bonds as a way of locking in yields before a further decrease in the future. The prices of bonds in America are usually high for the short-term securities, while the longer-term bonds have lower prices. It inverts the down-slope yield curve further.
Reference
Melicher, R. W., & Norton, E. A. (2013). Introduction to finance: Markets, investments, and financial management . John Wiley & Sons.
