Yield Curve has FLATTENED OUT

Yield curve can be prepared by plotting interest rates for various maturities on a graph paper. These maturities ranges from 3 months to 30 years. Logically Interest rate for 3 months will be lowest & for 30 years will be highest. Yield in layman terms means interest rates. Also yield curve can be termed as interest rate curve. Slope of yield curve says a lot about state of the economy and future of economic activity.

At various point of time we can see different slopes for yield curve.

1.  Normal Yield Curve – When the yield is increasing incrementally for higher tenure. This will denote normal expansion in economic activity.

2.  Steep Yield Curve – This can be seen when there is highest difference between 3 months interest rate and 30 year interest rate. Normally in excess of 3%. This denotes that the economic expansion will be fastest in times to comes. Also this signifies that demand for long term money is highest which goes towards creating capacities, which is long term in nature.

3.  Inverted yield curve – This is typically when interest rates are high and economic activities are slowing down. Demand for long term money is lower since people fear slowdown. Short term rates goes up due to increase in inventories and working capital. Also smart investor try to lock their money at higher interest rate before fall in economic activity.

4.  Flat Yield Curve – This is where the rate across maturities is flat. Yield curve can move in any direction – towards normal yield curve or inverted yield curve. This is where one has to be cautious. This is early signs of slowdown in economic activities. Nine out of ten times it will lead to inverted yield curve.

Today as we speak we have pretty flat curve where 3 months and 30 years money is available at same interest rate. Today market is advising short term funds where they are expecting yield curve to become normal by reduction in short term rates and increase in long term rates. We at JAIN INVESTMENT believes that economic activities will slow down and long term rates may remain same or go down and short term rates may move up making yield curve inverted. We are advising our client to be either in liquid or at longer maturities (If you are investing for long term).

Caution – Last time yield curve became inverted was October – 2008. I hope you remember what followed.