from Aditya Kondawar | by Aditya Kondawar

When the economy starts getting turbulent, everyone talks about the Yield Curve What is it? Different kinds of Yield Curves - Flat, Inverted, Normal/Rising. What are bonds? We will also look at some countries and their Yield Curves! Retweet for maximum reach :) Let's go 🧵👇 t.co/rF2LbeoBCb

1/n First, let’s understand what a bond is - - A bond is a debt security that represents a loan made by an investor to a borrower, usually a corporate or Govt. entity - The borrrower agrees to pay interest at a specified rate on specific dates and the principal back as well

2/n - The yield is what the investor earns per year - Assume 8rs is paid per year on a bond worth Rs 100 currently, then 8% is the Yield (more examples shown) t.co/uEcIqQiE28

3/n If you are lending money to someone for 3 months v/s say 5 years, the rate of interest will vary right? For 3M it will be less and for 5Y it will be more Keep this in mind

4/n The yield curve is a graphical representation of the yields on bonds (same credit quality) of different maturities We can see 6m, 12m,1y,2y upto 40y yields Shape of the yield curve gives insights into the market's expectations for future inflation, rates, economic growth t.co/D9KN6nNzkz

5/n Normal yield curve - - Long term bonds have higher yields than short term bonds - Considered a sign of a healthy economy as it indicates that investors are optimistic about the future & are willing to take more risk (interest rate risk, credit risk, etc) for more returns

6/n Normal Yield Curve Example (aka Rising Yield Curve) - India Look at the 6M Ago (oranged dotted line) Yield curve Long term bond yields >> Short term bond yields t.co/uUPdB6xqt8

7/n Investor sentiment controls the curve – - When investors think economy is in good shape, they take out money from long term bonds & put it in riskier assets such as stocks - Lower demand of bonds causes prices to fall and yields to rise (Inverse relationship) Example - t.co/DhE9omcmC6

8/n Flat Yield Curve - - In a flat yield curve, the yields on bonds with different maturities are similar - Indicates that investors are uncertain about the future direction of the economy Example is India - 6M yield - 7.4% | 30Y - 7.5% | 40Y - 7.5% A flat curve! t.co/4MktryZw51

9/n - A flat yield curve may arise from a normal or inverted yield curve, depending on changing economic conditions - When economy is transitioning from expansion to slower development or even recession, yields on longer bonds tend to fall and yields on shorter ones likely rise

10/n Inverted yield curve - - Shorter-term bonds have higher yields than longer-term bonds - This is often seen as a warning sign of an economic recession or slowdown because it suggests that investors have a pessimistic outlook on the economy's future prospects

11/n What do investors do when they are uncertain about the future? - They may prefer to invest in long term bonds to lock in rates (plus when rate cut cycle starts, bond prices will increase) + they will avoid risky assets such as equity

12/n - Long term bond instrument buying leads to increased demand & higher prices but lowers yields & hence the Curve inverts! - Whenever yield curve inverts, a recession period (marked in red) may follow - t.co/OwjRWeQhiw

13/n Inverted Yield Curve Example - USA #1 - As of Today #2 - Across different time periods (wanted to show the curve changing from rising to inverted) t.co/yfgj8snrUK

14/n Factors Influencing the Yield Curve - - Inflation Expectations - Economic Growth - Interest Rates - Central bank measures - Investor preferences

15/n Explained all the concepts and the Yield curve phenomenon in a Simple manner One can keep a track of it - one can also track bond yields of listed companies - Bond markets will tell you before problems arise!

16/n Conclusion - India's flat yield curve points towards a likely end of rate hike cycle or even steady rates expectation Also shows a shift of investors to long term bonds to lock in rates over riskier assets such as equity Follow me @aditya_kondawar for more threads!