The financial industry uses a ton of jargon, and here at Mullooly Asset Management we know that’s not always conducive to the average investor’s education. In this week’s Mullooly Asset Management podcast, Tom and Brendan explain the yield curve in a simple manner. You’ve probably heard a broker, advisor, or a member of the financial media refer to the yield curve before, but what is it? Don’t worry, after this week’s podcast you’ll be up to speed.
Tom and Brendan begin by explaining what a normal yield curve looks like. A normal yield curve is one where short term yield is the lowest. As you move right along the graph’s X axis (horizontal line) the yield becomes slightly higher. Intermediate term yields are higher than short term yields, and long term yields are the highest of the three. You can see an image of a normal yield curve embedded in this post. We obtained this image from Investopedia, and you can also check out this really great post about yield curve they provide: (http://www.investopedia.com/terms/y/yieldcurve.asp).
A Normal Yield Curve
A normal yield curve is also referred to as ascending. As a borrower, you’re paying lower rates to borrow money for a short period of time, and higher rates to borrow money for a long period of time. This type of scenario is normal and indicates expansion in the overall economy.
The opposite of a normal yield curve is called an inverted yield curve. Short term yields are the highest, with intermediate term yields coming in slightly lower. On an inverted yield curve, long term yields are the lowest of the three. This indicates a quick spike in rates. This tends to occur when money gets tight and usually indicates a high degree of risk in the economy. The money market is the safest place to be when the yield curve is inverted.
The final type of yield curve discussed in this week’s podcast is the flat yield curve (oxymoron!). In this scenario short, intermediate, and long term yields are all pretty equal. This indicates a period of economic uncertainty.
Now when you hear somebody discussing the yield curve, you’ll be able to cut through the jargon and know precisely what they mean! Make sure to tune into the podcast to hear some key points from Tom and Brendan’s discussion.