The Bond Yield Curve as an indicator of what’s going on with the economy

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.

|amp|

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

|amp|

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.

Bond yield 3 months 10Y 650x326 - The Bond Yield Curve as an indicator of what's going on with the economy

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.

Yield curve 650x867 - The Bond Yield Curve as an indicator of what's going on with the economy

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

|amp|

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.

You can be rich too - The Bond Yield Curve as an indicator of what's going on with the economy

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


Reviews 4 650x685 - The Bond Yield Curve as an indicator of what's going on with the economy

reviews 650x462 - The Bond Yield Curve as an indicator of what's going on with the economy

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Do let us know what you think about the article