Let me revisit the basics on Yield spreads, that whether Yield spreads can judge the risk environment in an economy ?images

Yield spreads are good tools to judge the risk environment in an economy a lower yield spread means that the issuer of debt is in a situation to demand loans at a lower spread above the yield of government security which in turn shows the presence of ample liquidity.

As far as economic growth is concerned a lower yield spread indicates greater amount of liquidity available for growthand entrepreneurial practices as well as a negative impact on the front of inflation. However the side effects of lower yield spreads might be excessive use of debt for unproductive uses like speculation etc which might hamper economic growth.

So what is a Yield curve just trying to put up in simple words :

The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money – showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. It also shows that a Rupee payable in the future is worth less today because of the relationship between time and money. A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his 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) is one of which the slope is negative, i.e. the long-term yield is lower than the short-term yield.

About these ads