okay I see yield curve mentioned constantly in financial news and I pretend to understand it but honestly I don’t. I know it has something to do with different maturities having different yields. but why does the shape of this curve matter and what does it tell you practically?
okay that makes sense. so what does an inverted yield curve mean when they talk about that on the news
and in India right now. is the yield curve normal or flat or inverted
Currently India has a broadly normal upward sloping curve but with some flattening at the long end. The 10 year G-Sec is around 7.1% while the 91 day T-bill is around 5.33%. That 177 basis point spread represents the term premium investors demand for lending for ten years versus three months. The curve has been steepening slightly in recent weeks as crude oil concerns have pushed long end yields up faster than short end yields. A steep curve generally signals growth expectations and higher future inflation. A flat curve signals uncertainty or rate cut expectations.
The practical relevance for a retail bond investor is this. When the yield curve is steep and long end yields are high, it is often a good time to lock in duration. You are being paid more than usual to take on the additional uncertainty of a longer tenure. When the curve is flat or inverted and short and long yields are similar, there is less reason to extend duration since you are not being compensated for the extra risk. Right now with the curve steepening, the 5 to 10 year part of the curve is paying meaningfully more than the 1 to 2 year part, which suggests medium tenure bonds offer reasonable value.
so monitoring the yield curve essentially tells you whether long duration or short duration is better compensated at any given time. and right now medium to long tenure is paying a meaningful premium over short tenure.
exactly. you don’t need to obsess over it but checking where 3 year versus 10 year yields are before deciding on tenure is 5 minutes of work that helps you understand whether you are being paid for the duration you are taking on.