The Living Yield Curve: What It Is and How to Use It

Economists use yield to predict the movement of interest rates in the market for both short-term and long-term investments. Financial markets are characterized by fluctuating interest rates which require monitoring by investors and economists to track the returns on investments (Neumeyer & Perri, 2005). Contrary to the popular opinion that interest rates move together, i.e., they go up and down along, the returns on investments such as bonds differ based on the maturity of the bonds and other investments independent of each other. Short-term and long-term rates move in opposite directions at the same time. The curve takes normal, inverted, steep and flat shapes. 

To this end, therefore, when living yield curve program is run, investments maturity time is on the x-axis while the returns on the investments on the y-axis. The plot connects current day yields with 3-months, 6-months, 12-months, 2-year, 5-year, 1-year and 30-years treasury maturities. When these points are connected, we get the yield curve. The market and economic factors dictate what happens with the interest rate in the stock market. From the curve, an inversion is seen within twelve months before the recession. This period runs for five to 16 months. Just before the downturn, the shape of the curve is inverted. This shows the peak in the stock market. Corporate profits experience downturn. The shape is explained by the investors' confidence that holding onto long-term bonds than short-term Treasury bills will make more money. Investors then turn around to re-invest in another investment before the downturn. Since investors hold onto long-term bonds, their yields reduce because they highly demanded while that of short-term investments increases. In my opinion, this is a good predictor of the future direction since it reflects both market expectations and the economic variables (Diebold & Rudebusch, 2013) 

References 

Diebold, F. X., & Rudebusch, G. D. (2013). Yield Curve Modeling and Forecasting: The Dynamic Nelson-Siegel Approach. Princeton University Press. 

Neumeyer, P. A., & Perri, F. (2005). Business cycles in emerging economies: the role of interest rates. Journal of monetary Economics, 52(2). 345-380.