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Fixed Income

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What is the yield curve?

The relationship between time and yield on securities is called the yield curve. The relationship represents the time value of money-showing that people demand a positive rate of return on the money they are willing to part-with today for a payback into the future.

A yield curve can be positive, neutral or flat.

A positive yield curve, which is most natural, is when the yield at the longer end is higher than that at the shorter end of the time axis. This is because people demand higher returns for longer term investments.

A neutral yield curve has a zero slope, i.e. is flat across time. This occurs when people are willing to accept more or less the same returns across maturities.

The negative yield curve (also called an inverted yield curve) occurs when the long-term yield is lower than the short-term yield. It is not often that this happens and has important economic ramifications when it does. It generally represents an impending downturn in the economy, where people are anticipating lower interest rates in the future.

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