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What is Humped Yield Curve?

1329 reads · Last updated: December 5, 2024

A humped yield curve is a relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments. Also, if short-term interest rates are expected to rise and then fall, then a humped yield curve will ensue. Humped yield curves are also known as bell-shaped curves.

Definition

A humped yield curve is a relatively rare type of yield curve that occurs when the interest rates on medium-term fixed-income securities are higher than those on long-term and short-term instruments. This curve is also known as a bell-shaped curve.

Origin

The concept of the humped yield curve originated from observations of interest rate changes, particularly during economic cycles where medium-term rates fluctuate significantly. Historically, this curve shape often appears during periods of high economic uncertainty.

Categories and Features

The main feature of a humped yield curve is that medium-term rates are higher than short-term and long-term rates. Its formation is usually related to market expectations of future interest rate trends, especially when short-term rates are expected to rise and then fall. The advantage of this curve is that it can offer investors higher yields in the medium term, but it may also indicate market uncertainty about the future economy.

Case Studies

A typical case is the early 2000s U.S. Treasury market, where a humped yield curve appeared due to slowing economic growth and adjustments in interest rate policies. Another example is Japan's bond market in the late 1990s, where similar curve shapes emerged due to economic recession and changes in monetary policy.

Common Issues

Common issues investors face with a humped yield curve include how to assess the trend of medium-term rate changes and how to make investment decisions under such a curve shape. A misconception might be that this curve shape necessarily indicates an economic recession, but it actually reflects market expectations of future interest rate changes.

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