The Changing Slope of the Yield Curve and Economic Prospects of an Economy Essay Example

9THE YIELD CURVE AND THE ECONOMIC PROSPECTS OF AN ECONOMY

The Yield Curve and the Economic Prospects of an Economy

Yield curve is a curve showing the movement of the interest rate within a specific period of time from the bonds and credit quality perspectives. The time period in this case is determined within the predetermined interval of time, usually quarterly, annually, or after every two years or more. Basically, the yield curve forms the benchmark for the debts that are in the market, such as the bank lending rates, mortgage rates, among others. According to Mishkin (2000), the bonds that have the same characteristics such as having the same risks, liquidity, as well as tax, have different rate of interest based on their maturities. The yield curve represents the spread of these characteristics graphically in terms of the long-term and short-term interest rates for particular bonds like the government bonds (Choudhry, 201).

These rates affect the economy in more than one instance. However, in this analysis, the yield curve is viewed as a major predictor and indicator of the changes in the economic output and growth. In addition, the yield curve helps in forecasting the future interest rates changes and economic activities (Choudhry, 201). With a keen interest on the economic growth patterns of the United States and Australia, a clear analysis of their yield curves within the time period of between 2009 and 2013 shows the various components of the economy that has positive and negative growth trends. The diagrams below show the trends of the interest rates in the yield curves of the Australian economy, and of the United States economy between 2009 and 2013.

Figure 1: Yield curve of Australia (2010)

The Changing Slope of the Yield Curve and Economic Prospects of an Economy

Figure 2: Yield curve of Australia (2011)The Changing Slope of the Yield Curve and Economic Prospects of an Economy 1

Figure 3: Yield curve of Australia (2012)

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Figure 4: Yield curve of Australia (2013)

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According to the Australian yield curves above, it is pretty clear that the trend of the interest rate is that of a mild increasing trend from 2009 to 2012. The yield curve rises sharply in 2013, indicating an increasing rate of interest. This rate affects the major component of the economy such as borrowing, savings, as well as money circulations in the whole economy. In the same manner, the economic growth trend from the basis of yield curves of the U.S. is as shown below.

Figure 5: Yield curve of the United States (2009)

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Figure 6: Yield curve of the United States (2010)

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Figure 7: Yield curve of the United States (2011)

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Figure 8: Yield curve of the United States (2012)The Changing Slope of the Yield Curve and Economic Prospects of an Economy 7

Figure 9: Yield curve of the United States (2013)

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From the yield curves shown above, it is true that the United States has an active economic growth pattern with a steady trend of interest rate as shown by the yield curve. There is a big difference when compared with the yield curve trend in Australia which is not completely steady as that of the United States.

The gradient of the yield curve determines the difference between the long-term and the short-term maturity bonds of a financial market, thereby being used simply for forecasting on the economic growth by policy makers. The major component of the monetary policy such as borrowing, investment, as well as spending depend on variables such expectations, economic growth, and inflation (Choudhry, 201). The empirical correlation that exists between the yield curve and these variables are hard facts that affect the monetary policy that an economy faces. Based on the figures illustrated below, the market reactions affect interest rates and vice versa thereby making the investors’ expectations are adversely affected by the yield curves trends.

In order to fix the short term interest rates, the central banks have to alter the yield curve, or wait for significant changes to shape the economy. In this way, by calculating the predicted real GDP growth over the next fiscal year, and by using the past values of the yield spread and the GDP growth, future real GDP can be determined.

F2 Capital market yield-government bonds (Australian Government)

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According to Mishkin (2000), the interest rates and the yield curve represent the predominant bids and offer quotations in each market. The RBA has target cash rates that are set by the Reserve Bank Board and also determine the interbank rate. Such rates affect rate of borrowing and saving in the economy more directly. As shown in the graph above, the monthly figures are the averages of the daily yields that affect the Australian Government securities.

References

(2000). OECD Economic Surveys Australia 2000. [S.l.], OECD Pub. http://encompass.library.cornell.edu/cgi-bin/checkIP.cgi?access=gateway_standard&url=http://dx.doi.org/10.1787/eco_surveys-aus-2000-en.

Choudhry, M. (2011). Analysing and interpreting the yield curve. Hoboken, John Wiley & Sons.

Geiger, F. (2011). The Yield Curve and Financial Risk Premia Implications for Monetary Policy. Berlin, Springer Berlin.

Mishkin, F. S. (2000). Yield curve. Cambridge, MA, National Bureau of Economic Research.

Twomey, B. (2012). Inside the currency market mechanics, valuation, and strategies. Hoboken, N.J., Bloomberg Press. http://onlinelibrary.wiley.com/book/10.1002/9781118531570.