Post by Admin/YBB on Dec 30, 2020 10:04:43 GMT -6
YIELD-CURVE is a plot of the yields of US Treasuries vs their maturities [overnight to 30 years]. While the default reference is to Treasuries, one can also have yield-curve for corporate, mortgage & municipal bonds. An UP-SLOPING yield-curve is normal; this makes sense because lenders & borrowers accept higher rates for longer timeframes. A down-sloping or INVERTED yield-curve is abnormal & is typical ahead of recessions. This happens when central banks raise short-term rates to slow overheating economy. In transition, there may be a FLAT yield-curve. Central banks in different countries have special names – #FederalReserve [FED] in the US, BOE in the UK, Buba or Bundesbank in Germany, ECB in the EU, BOJ in Japan, PBOC in China, RBI in India, etc.
Banks in the US are required to keep reserves at the Fed & they trade among themselves in the overnight FED FUND market. The Fed conducts #MonetaryPolicy [post 12/15/20 & new website] by 1) mostly controlling the overnight fed fund rate through the New York Federal Reserve [NY Fed], & 2) by occasionally buying [or selling] longer-term securities & that is called QE/quantitative-easing [or QT/quantitative-tightening]. These decisions are made at the Federal Open Market Committee [#FOMC] meetings that are regularly held; the Fed Chair may take emergency rate action in between the FOMC meetings. As these Fed actions can change the shape of the yield-curve, this is sometimes referred to as YIELD-CURVE CONTROL. Many deposit rates, adjustable-rates & business lending rates [#PrimeRate, etc] are affected by the fed fund rate, & the mortgage rates by the 10-yr Treasury rates, so the Fed actions have significant impacts on the economy.
As explained in an earlier post, bond PORTFOLIOS can have average yield, yield-to-maturity [YTM], 30-day SEC yield, etc [post 12/2/20 & new website]. A portfolio that has bonds of short & long maturities is called a BARBELL portfolio. RATE SENSITIVITY of a bond portfolio is given by #BondDuration [d]: +/- 1% change in rates [+/- 100 #BasisPoints or bps] causes opposite -/+ d% change in portfolio value [note the inverse effect]. Duration indicates RATE RISK while credit rating indicates CREDIT RISK. #PersonalFinance 12/30/20 AM.
Banks in the US are required to keep reserves at the Fed & they trade among themselves in the overnight FED FUND market. The Fed conducts #MonetaryPolicy [post 12/15/20 & new website] by 1) mostly controlling the overnight fed fund rate through the New York Federal Reserve [NY Fed], & 2) by occasionally buying [or selling] longer-term securities & that is called QE/quantitative-easing [or QT/quantitative-tightening]. These decisions are made at the Federal Open Market Committee [#FOMC] meetings that are regularly held; the Fed Chair may take emergency rate action in between the FOMC meetings. As these Fed actions can change the shape of the yield-curve, this is sometimes referred to as YIELD-CURVE CONTROL. Many deposit rates, adjustable-rates & business lending rates [#PrimeRate, etc] are affected by the fed fund rate, & the mortgage rates by the 10-yr Treasury rates, so the Fed actions have significant impacts on the economy.
As explained in an earlier post, bond PORTFOLIOS can have average yield, yield-to-maturity [YTM], 30-day SEC yield, etc [post 12/2/20 & new website]. A portfolio that has bonds of short & long maturities is called a BARBELL portfolio. RATE SENSITIVITY of a bond portfolio is given by #BondDuration [d]: +/- 1% change in rates [+/- 100 #BasisPoints or bps] causes opposite -/+ d% change in portfolio value [note the inverse effect]. Duration indicates RATE RISK while credit rating indicates CREDIT RISK. #PersonalFinance 12/30/20 AM.