What is the flattening of the yield curve?

The merger of the yield curve occurs when interest rates on long -term and short -term investments become more similar. In the normal market, the shorter the date of the investment, the lower its interest rate or income. The due date of the yield curve usually indicates a form of economic problems, including the imminent recession. Although bonds usually bear a fixed interest rate called the coupon rate that remains fixed to their maturity, the actual yield of the bond varies as the bond price depending on the whim of the market. When the market likes a bond, traders will pay more than its nominal value, which will reduce their effective interest rate. Conversely, if traders have a negative opinion on the bond, they will trade their price, effectively raise interest rate or income.

Usually short -term bonds are significant importance of lower interest rates than long -term bonds. This happens because investors who buy bonds generally face less risk in short -livedBY INVESTS. With a short -term investment, investors get their money back earlier, reducing the risk of not being repaid. In addition, because the investment occurs in a short period of time, there is less inflation and the risk of increased future inflation.

The due date of the yield curve usually concerns government state treasures with high quality, such as those issued by the US government that is the world standard. These highly rated bonds usually offer some of the lowest revenues of all available investments, while short -term bonds offer the lowest yields. However, when the economy turns badly, investors tend to move their money to extremely safe investments. Increasing demand supplies increase prices and reduce yields.

The initial effect of this flood of capital into bonds is to reduce interest rates on short -term bonds. In times of economic uncertainty toAnd the investment becomes suspicious. Since investors who are less risk of assessing are moving from bonds, shares and other investments with lower rating, they move to long -term high -quality bonds. This increased demand shifts the interest rates of these bonds, which reduces interest rates on all bonds, causing the flattening of the yield curve.