15. What is a Yield Curve

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In this lesson, students learned how to read a yield curve. When looking at the yield curve, it has two major components - yield and term. The yield is found on the y axis and it represents the amount of interest that we'll be paid for owning a particular bond. The term is found on the x axis and it represents the duration we would hold the bond at the specified yield.
Although reading a yield curve is fairly straight forward, many people fail to recognize its importance in determining the direction of the economy. As you saw in the video, the yield curve is flat or slightly inverted when a financial market is at its peak. Slightly before and after a market collapses, you would find the yield curve slope in a positive direction.
When we move into Course 2, Unit 3, it'll be important to continue looking at the yield curve as we determine a metric for our "zero risk" investment - the 10 year federal note.

[@DFridrich]

Preston, your videos are one of the most valuable resources found on KZbin. Keep up!

[@Ana-wx8jm]

I was blind but now I see.... Thank you! The internet is so empowering!

[@Kiwinnit]

it truly is!

[@calin6327]

Limitless?

[@shootingstar3371]

@Manuj Madan and your a 'nice guy'

[@jackwang4551]

amazing! I had a look at the data for this year and I could very clearly see how the interest rate just dropped to almost to zero when the Corona crisis started. I love your videos, they are just so good.

[@Alfoncos]

Informations in the video imply corona recession will be much deeper.

[@swordwalker59]

It must be one of the best yield curve explanation video on KZbin. Thanks!

[@KIngswizard]

Thank you for this easy to follow video.

[@torimarshall7599]

Thanks for these fantastic resources! I've read the book and am now going through the videos. Scary and complex to simple gaining confidence! What a great thing to share. Happy sailing!

[@sashith4131]

what a valuable lesson.Prolly learnt more in 5 of these videos , than doing economics at school.

[@aaronchow2366]

Thank you Preston for all of your videos. I'm watching every single one of them, and becoming a better investor every single time. Thank you for showing me, really, how unqualified I was to be investing in stocks. Now I'm more honest with my risk levels. Thanks again. Please keep the vids coming!

[@tinnguyen2219]

Wow Amazing! Thank you so much for all your videos , I was walking blindly into the economy all this time. Greatly appreciated.

[@Iveysmart]

Thanks! Your teachings are very practical and student-friendly.

[@jagdishms6]

These videos are so enriching.. Many thanks for sharing the knowledge.

[@govindachawlaom]

Amazing video , very insightful. Love it. Opened my mind ! Thank you Preston !

[@Singular121]

Very informative lesson. Thank you

[@5boterbloem]

Thanks for explaining this so well

[@vachirasakone]

I appreciate your presentation.

[@enayathali8971]

very well put together video on this topic, and using your experience and explanation to folks who's not familiar with it, gives a full grasp of knowledge how it works in the real world. Thanks

[@pathynes7708]

The Fed influences short-term interest rates. They do not influence long-term rates - supply/demand and investor expectations determines this. For example, the economy is overheating and the Fed has been gradually raising the fed funds rate (short-term). Investors foresee rising inflation and short-term rates rising and sell long-term bonds and steepen the curve. Or the Fed could be raising short-term rates and investors foresee weak economic performance and perhaps rates will not only stop rising, but will fall. They would buy long-term bonds sending the long-term yield down and causing an inverted yield curve. The Fed does not cause an inverted yield curve on purpose to slow down the economy. The Fed would also never want to cause a recession, which has happened every time after an inverted yield curve. All of this is much harder in practice and very difficult to time, which the Fed has had trouble doing.

[@tigerklein8114]

Wow, this is invaluable! Thank you very much!!!

[@michellerubin2066]

Thank you for this great video resources! The treasury site appears to have changed slightly, it is not showing the data as a graph rather just the rates - I do have Adobe... so not sure why I can not get them to plot... any ideas?

[@davidnguyen4715]

great teacher - very easy to understand.

[@Shaniloka369]

Your help really make people not afraid of stocks market. Thank you

[@momenttom4969]

8 year after post, the video's remain all their value

[@LH-ky6hh]

Hello, I am Canadian , and I want to know if there is a tool to show the canadian bond yield curve as well

[@ashish9patel]

Hi Preston I'm a big fan. I'm from India and I'm sure our version of FED is RBI The thing is I wasn't able to find a yields curve like that can you suggest where to get it and is it necessary for these institutions to Predict long term interest rates or they can change it when they want

[@WheresNaldo]

I always come back to these videos when I need to re-understand market forces haha

[@loicminty7535]

These videos are a gem!! I would like to know if I am Canadian should I refer to a Canadian version of the FED or is the FED the main indicator/influence of interest rates here too?

[@andreattafabio]

awesome vid! keep up the good work!

[@ZxZ239]

I still don't understand how is this course FREE here on youtube, I would pay money for it, and I did for your book. Quick question, from this video made from 2012 to today in April 2017 Dow increased from 12k to 20k but yet I checked every year on the treasure yield curve and it still in the up curve mode, why didn't the Fed increase rate to try to slow down the growth? Because at similar point in 2000 the interest from 1 year to 30 year were both at 6% but during this stock market growth from 2012 to today it is still stuck at 0% to 3%. Why??

[@alee4866]

my thought exactly!

[@abhishekdas7450]

Thanks Preston for the wonderful videos. I have a doubt on the yield curve, do we need to subtract the inflation rate to get the actual value of the yield %?

[@imlkr_]

Yes of course.. Your actual rate of return is always relative to the inflation.. He has mentioned it in the lesson " bonds"

[@rafaelpesconi6362]

The yield curve you show of the FED is of the variation that a bond emited in that year by the government will have till it hit the 30 years old?

[@jacobsaulnier6700]

January 2019, curve is flattening a lot........ might be a hint as to whats to come

[@davidgutierrez8795]

great video, it would be nice if link is updated as it does not work any longer

[@abenezerk4984]

Great Explanation

[@lostmyredcrayon]

It’s August 2019 now and the yield curve is looking inverted once again

[@UseQPixinDune]

Looks like it's time to stock up my underground shelter

[@sarveshbajaj5178]

And it's 2020 and we are in for a recession..bless the yield curve!

[@ciceroaraujo5183]

Amazing communicator

[@itsfrias2564]

Super Thank You! I finally found the Treasures!

[@karencheesman7584]

Ah! Found it. Here is the link: www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

[@matszz]

Thank you, much appreciated.

[@6toolbaseball]

Now unauthorized

[@jedi3667]

@@6toolbaseball wonder why

[@jethrolim7664]

i love your videos

[@dbiswas]

Question... 5% per yer for next 30 years or just straight 5% after 30 years?

[@kreteman777]

Well its May 2018 and the curve is flattening. Would love to get your thoughts. This usually marks the peak of a cycle.

[@hedf]

Its june 2019 and its inverted

[@valuefocused2783]

Will you do a video of their updated site to show how to follow along? Kinda confused.

[@soniab4967]

Me too! I'm not sure how to do this with the new website.

[@jeffbwitty]

The US Dept Treasury website doesn't seem to have the yield in graphical form anymore. Is anyone else having trouble finding the charts?

[@ArunRangarajan]

Thanks for your wonderful videos. Looking at this video alone, it is very tempting to think that using the treasury yield curves, one can predict the future of stock market. You have used all yield curves from JAN to prove your point. However if you look at FEB 08 thru AUG 08, the yield curves were all positive and we still had the crash in SEPT 08. The yield curves were all flat in 2007 till JAN 2008 though, so one could consider that as a warning, but following the yield curves too closely (month-by-month) could have worked against this hypothesis.

[@texasaggie85]

Arun Rangarajan the recession was starting to show signs in mid 2007... I think he’s saying that as the slope is starting to decrease the economy itself is entering a rough patch. The stock market doesn’t necessarily react immediately. It fell in 2008... and crashed rather quickly

[@RD-ei2gh]

How can I view these charts on the web site

[@katekeberg41]

Thanks for the video, I am unable to find the chart on the Treasury website aswell, trying different links posted here, can someone advise me on how to find it please??

[@samreenthokan4813]

hello there. I am investing into nifty stocks which is Indian market. can any one please tell me if a separate yield curve exist for Indian markets or I have to follow the US yield curve

[@lightmm1043]

Do someone have the website that shows the chart has his I do not find it now and it's been a long time since he posted

[@Dkventurevistas]

Thanks for the video first. I am a fresh beginner for bonds. There are something confusing. First, what does the yield here mean: the coupon rate, current yield or compound yield? If it is compound yield, the yield should depend on the market price on the day of predication, right?

[@spock949]

He made this video in 2012. Here we are in 2020 and the yield curve has inverted.

[@amilliondollarafro9150]

It's interesting though because although it's inverted, Interest rates are half what they were in the late 90's and mid 2000's. I wonder what that's gonna mean? small recession? Either way it's probably a time where buying bonds is a smart move. According to the yield curve.

[@spock949]

A Million Dollar Afro I just went all cash last week. I’ll begin a DCA back in in May.

[@amilliondollarafro9150]

Amir Memon What is a DCA? dependent care?

[@spock949]

@@amilliondollarafro9150 dollar cost averaging.

[@ChrisFuchser]

Where can we find the Historic Yield Data Visualization now? Treasury.gov doesn't seem to have this chart available anymore.

[@christhuang911]

Excellent video. 很好

[@fruitgrapepwnage]

I don't understand something about the curve - is it showing the yield of currently traded bonds or the bonds that the federal reserve is issuing on that particular day?

[@milos468]

@preston Pysh does your TIP finance tool work for ASX listed companies or US only?

[@sheenabhdhar5287]

I wasn't able to understand the concept at all. Could you please help me with it? How does the interest rate relate with the economy? Is it the interest rate that the government is providing on its bonds with different maturity periods as measured on the X-axis? I somewhere read that it is the expected interest rate that is measured on the Y-axis and not the actual one. Could you please clarify my doubts?

[@Gurjars007]

Thanks you sir

[@zhangmark3557]

I thought flat yield curve is a negative indicator and upward sloping yield curve is a good indicator. Which is opposite of what you are saying in the video. I thought upward sloping yield curve is pretty normal because longer term bonds involves more risk, so investors seek more compensation for it, therefore long term bonds would have a higher yield. When yield curve is flat, it means more investors are choosing to buy long term bonds which drives the price up, and therefore reduces long term bond yields causing the curve to be flattened. The reason why more investors are demanding long term bonds is because the economy might experience a recession where the risk of investing in other areas is greater than the risk of buying a long term bond. Correct me if I am wrong.

[@dazwackmanforeal6213]

Hey Preston, neat clarification on how to use the Yield Curve. One problem, the US Treasury site doesn't allow me to view it in the same format that you use in this video. Is there another method for people to view the Yield Curve just like how it did in this video? What I see on the new one are charts for "Nominal and Real": www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx

[@ExtremeTG]

is there a similar yield curve for UK, i wanna check it out but cant find it

[@xphoniksHD]

markets.ft.com/data/bonds

[@MyDreamside]

i am in Greece in the eurozone for now, 1) Does the federal reserve bank policy affect the Euro area too? 2) If i want to buy bonds in euro, should i look the Euro central bank yield curve? i think due to globalization, all treasure yield curves must be similar, am i right?

[@ExtremeTG]

MyDreamside yea thats a good question. As someone in UK, i am also interested in this. So have you found the answers, if u have, mind sharing it :)

[@Secretsofsociety]

+MyDreamside If the US decides it wants to pursue contractionary policy it will increase the strength of the dollar compared to other currencies. This will make trade agreements with the US preferable as the US will be paying in USD. This leads to a trade deficit where goods and services comes into the US and financial capital outflows. If this happens Europe will likely also pursue contractionary policy in order to keep market share on their imports.

[@evenaicantfigurethisout]

a positively sloped yield curve doesn't always indicate that a recession is coming right? so what type of a positive yield curve should cause us to worry and what type not so much?

[@robertocanales1201]

Thank you very much! 😑👍🏼

[@turtlenecks]

Can anyone explain how this concept correlates to buying Bond Index Funds? Say right now you were to buy the US Aggregate Bond Index at the present interest rate and the Fed decides to raise later this year.

[@alee4866]

where is the yield curve link?

[@oleklis9]

Great video Preston. I decided to check out the current US treasury yield curve and it looks the same as the 2012 yield curve did, however we are no longer in the midst of a recession so I'm confused as to why the US is trying to stimulate the economy when the stock market is currently booming. Can you please explain why the US treasury is acting in this way? Website for reference: www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

[@andrewalberts2402]

so its good to buy bonds when interest rates are high or low? I know you mentioned it before but I forgot haha *****

[@orvol]

Andrew Alberts When interest rates are high buy bonds, sell stocks and when interest rates are low sell bonds, buy stocks.

[@reeceadam5558]

Old post, but Ill give a quick example: You buy a $100,000 bond with a 10% interest rate - you get $10,000 per year. The interest rates now go down to 5%.Your bond is now worth $200,000 because the new owner will still be getting $10,000 per year, and $10,000 / 5% = $200,000. So yes, you want to buy when interest rates are high and sell when interest rates are low (or just keep the bond for the income it gives you)

[@kriteshchoudhary2997]

Where can i find the yield curve of india?

[@jagdishms6]

I believe this is the one www.worldgovernmentbonds.com/country/india/

[@kriteshchoudhary2997]

Thank you so much

[@jasonkim9084]

fire

[@jichengjeff]

In a nutshell fed action is before market and behind economy thanks a lot!

[@jichengjeff]

Rather bond market before fed and fed before stock market this is tradable now let’s see what happens tomorrow

[@devonlooney9683]

2020

[@abrahamsanchez5840]

OMG!!!!!!

[@neko3583]

Please let me know if my comment is accurate?Let's say the Fed raises interest rates because they want to slow down the economy making difficult to borrow money and by raising the interest rates people tend to purchase bonds as the interest rates are high..right?? so.,The Fed is slowing down the economy making difficult to borrow money and also getting money from the sold bonds which for me makes sense as they want to decrease the amount of money flow in the market.I apologize in advance if my english was awkward.

[@Felipe-lu6sl]

awesome video! One small comment: The link used in the vid has changed slightly. Who can give me and maybe some other people the new one? Many thanks!

[@adamwetzli3341]

looking as well, gotta prepare for corona and fill up my stocks

[@adamwetzli3341]

www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2020 I think thats it, doesnt show the graphs though. It's a bit more inconvenient but you can see that the curve (have to create it in your mind), from the values given, is definitely super benevolent for short term investmens as the yield percentage for march is about 0%. If i read that stuff correctly though. Im a bloody amateur

[@dadnumber1140]

love theys videos you are my m.v.p

[@Allanudal16]

I don't get it, is it a "yield" curve or "interest rate" curve? or is it the same thing? why did you start talking about borrowing money? what is the relation to "yield" on bonds?

[@martinberaldo8414]

I think its because it's a federal bond, that's why he talks about borrowing money.

[@gruminatorII]

3 % is low ? 2020 its 1.4% for 30 year bond and nothing for short term bond, you would be rightout stupid to buy bonds right now

[@wadehsu4300]

are you a millionaire?

[@cameronmilne3590]

I know this comment is ancient but if you read Benjamin Graham's book, "The Intelligent Investor", there's a fantastic quote. "I once interviewed dozens of residents in Boca Raton, one of Florida’s richest retirement communities. Amid the elegant stucco homes, the manicured lawns, the swaying palm trees, the sun and the sea breezes, I asked these folks - mostly in their seventies - if they’d beaten the market over the course of their investing lifetimes. Some said yes, some said no. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in Boca.....” So it's not about becoming a millionaire, although admittedly that would be nice, but about ensuring your investments allow you to do the things you want to do. The paragraph continued - " .....I can’t imagine a better answer. After all, the whole point of investing is not to earn more money than average, but to earn enough money to reach your own goals. The best way to measure your investing success is not by whether you’re beating the market but by whether your investments are growing steadily and rapidly enough to get you where you want to go. That means that staying put, in an index fund or even in a fund that is underperforming the S&P by a point or two, is better than climbing onto the whizzing treadmill of trying to beat the market. In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you do cross it.

[@Darkiekurdo]

The Federal Government/Federal Reserve doesn't control long-term interest rates...

[@CMDR_Birb]

It has an impact though, no ?

[@azatalibaev8220]

Are you confusing fed and us treasury??? =)))

[@kamfaicheung8953]

With a camera to the window the woman who would need some ideas on my watch LOL will it all my don’t wanna come home yo yo-yo bully bully all of that my dog are you normal idea going gym can you get your machine

[@davidsaomi6493]

Preston, will you marry me?