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What Are the Best Tips for Yield Curve Analysis?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 06 September 2016
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There are a couple of different ways to approach yield curve analysis. One is to study the current shape and level of the yield curve. The other is to consider the pattern the yield curve has followed in the past. Typical time frames that analysts review include periods from three months to up to 30 years. Overall, the goal is to use these techniques to make a comparison between the different notes on the curve in order to find the most advantageous course of action.

One way to approach yield curve analysis is to compare different kinds of bonds. Common variations include different issuers and varied quality as determined by bond ratings. Studying different types of issuers, such as corporations versus governments, can also be useful.

Another method of yield curve analysis is to use the expectations theory model. This method uses long-term interest rates to estimate short-term returns. The theory is that the long-term rate will be the final result of several changes along the yield curve. This can be a useful method for investors looking to use the yield curve to maximize returns over the short term.

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If the curve is upward sloping, a potentially profitable form of yield curve analysis is to buy a note with a longer term than desired and cashing it out before maturity. The purpose of this method is to catch a higher interest rate. This is essentially the process of tracking the curve, estimating when it is at its peak, and selling before it declines. It is often best to use analysis of past curve patterns to anticipate the sell date before purchasing the note.

Another method of yield curve analysis is to study the spread between different notes. By examining the difference in percentage between two investments, it can be easier to determine which is likely to be the better option. The method involves determining if the spread between the two is typical or if one side is showing a measurable advantage.

Which method of yield curve analysis to use depends upon the goal of the investor. This is primarily the process of deciding if an investment is going to be short or long term. The process of analysis can also reveal which length of investment is best. For this reason, it can sometimes be most beneficial to use multiple types of analysis to examine the yield curve.

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