Chart of the week: A move to steeper yield curves

Data-driven insights and analysis from our investment team every week.

What is a steeper yield curve and what does it mean for markets, or more importantly, investors? The yield curve is a plot of the interest rates or yields available at each given maturity. Typically, the longer the maturity or duration of the bond, the higher the interest rate. Just as investors demand a ‘credit premium’ for holding riskier corporate credit bonds, longer duration (maturity) bonds will have a ‘term premium’ above the cash rate to compensate investors for their money being invested for a longer period. This ‘term premium’ is linked to expected economic growth and inflation expectations.

In years gone by, the unique interest rate and economic landscape led to a non-typical yield curve shape, an inverted yield curve (short term yields are higher than longer term yields, leading to a negative ‘term premium’). This was due to a few factors. Central banks remained on hold, which kept short duration (maturity) yields high, whilst low growth and inflation expectations weighed on long term yields. Today yield curves have moved away from this inverted shape and are steeper once more. In other words, long term yields are higher than short term yields. Focusing on the German curve as an example, the dramatic number of cuts from the European Central Bank has led to lower short maturity bond yields, whilst the fiscal stimulus package in Germany has led to higher growth expectations which has helped to push longer term yields higher. What does this mean for investors? Catch next week’s chart of the week for more thoughts.