Bonds and the yield curve
The bond market prices money itself. What a yield is, what sets it, what an inverted curve says, and how government debt feeds in.
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In this video
- A bond is a loan. When bond prices fall, yields rise, and the other way round.
- 3 things set a yield: the central bank rate, inflation expectations and risk.
- An inverted curve means the market expects rates to fall later, usually because the economy weakens. In the US it has come before most recessions of the last decades, with timing that varies a lot.
- Short-term yields show what the market expects from the central bank. Long-term yields show its view on growth, inflation and risk.
Next videoMacro FirstCurrencies follow rate expectations1:49A currency pair is a tug of war between 2 economies, and the strongest rope is interest rates. Why the expected rate gap moves the pair.
Key terms
- Bond yield
- The return an investor earns on a bond. Yields rise when bond prices fall. Short-term yields follow rate expectations, long-term yields follow inflation and growth.
- Recession
- A period in which the economy shrinks instead of growing, usually with rising unemployment.
- Fiscal policy
- How a government taxes and spends. It is separate from the central bank, which runs monetary policy.
- Credit rating
- A grade from an agency such as S&P or Moody’s that rates how likely a country or company is to repay its debt.