Question

• Over the last six months, the long-term yields declined, while short-term yields remained the same. Analysts stated that the shift was due to revised expectations of interest rates. Given the shift in the yield curve, does it appear that firms increased or decreased their demand for long-term funds over the last six months? Look up the current yield curve from the US Treasury site and research yield curve implications for recessional or boom market climates. What do you interpret from the yield curve and provide an opinion on what you expect with regard to the future economy and rates?

Answer 1

Since the long-term yield has declined it implies that the firms have decreased the demand for long term funds. A lower demand has reduced the cost of funds which is the yield for the funds.

During times of recession the yield curve gets inverted. This implies that the short term yield is higher than the longer term yields and people do not expect their investment to grow in the long term. Looking at the current structure of the yield curve it looks like the economy is on the verge of a recession. The short term yield remains the same while the long-term yields are declining.