Corporate Yield Curve
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The corporate yield curve or the corporate bond yield curve reflects the relationship between the cost of borrowing or the interest and the maturity period of corporate bonds. Investors and financial analysts follow the shape of the yield curve very closely. This is because it provides information to compare the yields from short term and long term fixed income investments. Investors analyze the shape of the corporate yield curve so that they can stay well informed about the economy’s future direction and the interest rates.[br]
Types of Corporate Yield Curves
The shape of a corporate yield curve is continuously evolving as it reflects the changes in the interest rate. Here are two major types of yield curves.
Normal Curve: A normal corporate yield curve is upwardly sloped. In such a situation, the yields from short term corporate bonds are higher than long term corporate bonds, with yields increasing as the maturity period increases. The yields from long term corporate bonds are higher. This is because investors take more risks since long term fixed income securities are more vulnerable to changes in bond prices caused by interest rates over time.
Investors and financial analysts watch the current shape of the curve, and the yield curve movements to see whether it is getting steeper or flatter. Suppose the US Fed reduces short term interest rates, the yield curve will get steeper.[br]
Steep Corporate Yield Curve: If the corporate yield will get steeper, it indicates that the difference between long term and short term yields is huge. In this situation, the market will expect the interest rates and the return or yield to increase. This is due to increased risks throughout the maturity period. When the yield curve is flat, it indicates that the difference between the short term and long term yield is modest. An investor will not get much return because the market expects the interest rate to fall, causing a rise in bond prices and a decline in yields. Those investors who hold securities of longer maturities are most likely to benefit more from this scenario.
Be alert about the interest rate movements and corporate yield curve if you want to predict the yield trends so as to invest wisely. Tracking the market for interest rate is essential, particularly for short term investors with fixed income securities.