What is a Yield Elbow?
How Does a Yield Elbow Work?
Also known as the term structure of interest rates, the is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. Note that the chart does not plot coupon rates against a range of maturities -- that's called a spot curve.
The yield curve. If short-term yields are higher than long-term yields, the curve is called a negative (or "inverted") yield curve. A flat yield curve exists when there is little or no difference between short- and long-term yields. The elbow is the highest point on the curve.shows whether short-term yields are higher or lower than long-term yields. There are three main types of . If short-term yields are lower than long-term yields, the curve is called a positive (or "normal")
Why Does a Yield Elbow Matter?
curves change all the time. Thus, the elbow, which signifies the at which investors would earn the highest rate of interest on a particular type of , changes all the time too. (Remember, a only conveys information for a certain type of , not for all .) Thus, investors usually look for signs in the that the elbow is about to peak or has peaked so they can act accordingly.
It is important to remember thatcurves change shape for a variety of reasons, which makes predicting elbows difficult. And in some cases, curves are flat and there is no real elbow at all.