Last Updated on September 25, 2019
The yield curve is a plot of current yields of bonds from the same type of issuer versus their respective maturities. Observing the bond yield curve is a way to find out what is going on with our economy. In this post, I discuss how one can do this some examples.
Before we begin, my book with PV Subramanyam, You Can Be Rich Too is available at 50 discount (Rs. 198) for short periods of time this month as it was among the top 25 bestsellers in the last 3 months. Grab it now!
First, let us look at the evolution of the RBI policy rate.
source: tradingeconomics.com
IN the early 2000s, rates came down sharply as India came out of a debt crisis. Inflation was low, and the state was set for economic growth. The stock markets zoomed up until the 2008 crisis. The crisis triggered a rate cut to handle liquidity. The subsequent recovery and high inflation resulted in rate hike and it has been reduced in stages only the recent past.
These changes are reflected directly in the short-term bond yields and indirectly in the long-term bond yields as shown below.
Under normal circumstances, bond with higher duration (from the same issuer) will have higher yields due to the inflation risk associated with the tenure than bonds with lower duration. And normal circumstances refers to increasing inflation due to economic growth. That is demand for goods (which is good) is higher than supply, resulting in inflation. This results in a normal yield curve.
If the short-term and long-term bond yields are similar, this can indicate an uncertainty of economic growth and inflation, resulting in a flat yield curve. We had this just after the 2008 crash.
In July 2013, RBI hiked the short-term interest rate to stem the purchase of short-term bonds, reduce liquidity in the market and support the falling rupee. As a result, the short-term yields skyrocketed (see top graph) and produced an inverted yield curve.
The video below (no audio, safe for work) shows the change in the yield curve from
Jan 2013 (flat ) –> July 2013 (inverted, bond crash) –> Dec 2013 (flat and wavy) –> June 2015 (tending to normal after rate cuts) since then.
So we have gone from a flat yield curve (recession) –> inverted yield curve (weak rupee and uncertainty) –> flat –> tending towards normal.
This is a sign of weakening inflation and rate cuts. We now have a stable government for at least until 2019. The only thing missing is real corporate earnings. If that shows up, the real party begins. 🙂
in.investing.com offers a simple way to observe current and past yield curves.
Head to https://in.investing.com/markets/india
and select bonds. There are fascinating ideas associated with the yield curve – for eg. rolling down the yield curve. Will cover these in future.
New Delhi DIY Investor Workshop April 23rd 2017
Register for the New Delhi DIY Investor Workshop April 23rd 2017
You Can Be Rich Too With Goal-Based Investing
Happy to announce that my book with PV Subramanyam has been selected as part of Amazon Best Reads Mar 2017. Now 50% off!. Thank you for your support and trust. If you have not yet got the book, check out the reviews below and use the links to buy.
Reader Quotes:
Gift it to your Friends and Relatives whom you care more. Already follower of Pattu and Subra’s forum. Ordered 4 more copies to give gift to my friends and eagerly waiting to read
The best book ever on Financial Freedom Planning. Go get it now!
Your first investment should be buying this book
The (nine online) calculators are really awesome and will give you all possible insights
Thank you, readers, for your generous support and patronage.
Amazon Hardcover Rs. 199. (50% off)
Kindle at Amazon.in (Rs. 307)
Google Play Store (Rs. 307)
Infibeam Now just Rs. 307 24% OFF.
If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Bookadda Rs. 344. Flipkart Rs. 359
Amazon.com ($ 4.61)
- Ask the right questions about money
- get simple solutions
- Define your goals clearly with worksheets
- Calculate the correct asset allocation for each goal.
- Find out how much insurance cover you need, and how much you need to invest with nine online calculator modules
- Learn to choose mutual funds qualitatively and quantitatively.
More information is available here: A Beginner’s Guide To Make Your Money Dreams Come True!
What Readers Say
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Join our courses in exclusive Facebook Groups!
- 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
- Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content) in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)