Amina Sammo
School of Finance & Financial Management, Business University Costa Rica
Email: minasammo@gmail.com
Abstract
In the past week, the American investors witnessed an inverted yield curve for the first time since the year 2007. An inverted yield curve is one of the most tell-tale signs that a recession is around the corner. This is the reason why the sighting of the yield curve sent both the equity as well as the debt markets in a frenzy. In this article, we will understand what a yield curve is, what an inverted yield curve is and what the history behind these curves is. American treasury bonds are considered to be the safest investments in the world. This is because the American government is the most powerful financial institution in the world as of now. American treasury bonds have the full faith and backing of the American government. Hence, they are seen as being infallible given the current financial order. The interest paid by these treasury bonds is known as the Treasury yield. Now, the American Treasury department issues a wide variety of bonds with different maturities. There are bonds issued for a three-month period as well as ones which are issued for thirty year periods. The respective yields of all these securities are mapped on a graph sheet. The resultant curve is called the yield curve since it signifies the yield that the investors will get on their investments based on the time that they have invested their surplus for. It needs to be understood that the treasury yields serve as a proxy for interest rates. Hence, an increase or decrease in the Treasury yield has an effect on almost every investment in the market place. In this article, we will discuss the rise and fall of the Long Term Capital Management fund.
Keywords: Inverted Yield Curve, Investors, Investment, Long Term Capital Management (LTCM)
