The Yield Curve as Economic Indicator

If fiscal and monetary policy are both tight (or loose), economic growth is likely to slow (or accelerate.) When fiscal and monetary policy are at odds with each other, the outcome is less certain. The slope of the yield curve can help investors interpret the relative policy influences.

Loose monetary and fiscal policies encourage growth at the risk of inflation. As a result, the yield curve tends to be steeply up.

A loose monetary policy combined with tight fiscal policy has less inflation risk, and the yield curve slopes up more modestly.

Tight monetary policy combined with loose fiscal policy causes short term rates to be higher than normal, and the yield curve to be flat.

Tight monetary and tight fiscal policies should slow the economy and curb inflation, often resulting in an inverted yield curve.

For more information, see all articles on: Asset Allocation, Economic Analysis, FInancial Planning, Investment Returns, Portfolio Management

See also:
  • Yield Elasticity
  • Economic Forecasting Using Leading Indicators
  • Extensions to Classical Bond Immunization Theory
  • Using Economic Information to Forecast Asset Class Returns
  • Enhanced Indexing Risk Factors in Fixed Income Portfolios
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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