Economics by Tejvan Pettinger

Author:Tejvan Pettinger [Pettinger, Tejvan]
Language: eng
Format: epub
Tags: Economics
Publisher: Arcturus Digital Limited

BOND YIELD CURVE

There are different types of bonds available to buy. These can include short-term bonds (e.g. three months or a year) and long-term bonds (e.g. 30 years). The importance of this is that the yield on long-term bonds can give an indication of what the market expects to happen to inflation in the future. If markets expect persistently high inflation in the future, this reduces the value of money, so investors require a higher bond yield on long-term bonds to compensate for the effect of future inflation. However, if markets expect deflation, the value of money increases and the yield on long-term bonds will be lower as a result. An inverted yield curve is said to occur when the yield on long-term bonds is less than short-term bonds, and this is said to indicate that the markets predict low growth and deflation over time. Bond markets have correctly predicted a worsening economic situation several times, although they are not foolproof and investors can get it wrong.

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