Explained: Bonds, yields, and inversions

  1. The global economy continues to be hit as one big economy after another falters on economic growth.This increases the likelihood of a global recession in the coming future.
  2. As talk of a recession has started,Bond yields curve have also featured in the news both globally and within India as it most accurately reflects what investors think about current and future economic growth prospects.
  3. A bond is an instrument to borrow money.A bond could be floated/issued by a country’s government or by a company to raise funds.
  4. Since government bonds which are referred to as G-secs in India come with the sovereign guarantee,they are considered one of the safest investments.As a result,they also give the lowest returns on investment or yield.
  5. On the other hand,investments in corporate bonds tend to be riskier because the chances of failure and the chances of the company not repaying the loan are higher.
  6. The Bond yield is the effective rate of return that it earns.But the rate of return is not fixed as it changes with the price of the bond.
  7. Bond Yield curve is a graphical representation of yields for bonds with an equal credit rating over different time horizons.
  8. If bond investors expect the economy to grow normally,then they would expect to get more yield when they lend for a longer period.This gives rise to a normal upward sloping yield curve.
  9. The steepness of the yield curve is determined by how fast an economy is expected to grow. When the economy is expected to grow only marginally, the yield curve is “flat”.
  10. However,yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond.A yield inversion typically portends a recession.An inverted yield curve shows that investors expect the future growth to fall sharply.