Bonds: Yield Curve

Buy when the coloured lines trend higher, sell when they trend lower

This tool uses the yield curve to look at the relationship between consensus expectations and bond prices. It is designed not only to show the current position but also to provide a Best Guess as to the future trend. For comparability, es have been rebased to set year-end 1994 at 100. government bonds index

In each chart the bond price index is shown in as the thick white line on the right hand axis. The main explanatory variable, the yield curve i.e. ratio of long-term bond yield to short-term interest rates uses the left hand axis and is shown as the thin yellow line. A Best Guess as to the future development of the ratio is also shown on the left hand axis, as the thin orange line.

Best Guesses suggest what would happen to the yield curve based on forecasts for bond yields and interest rates. The base level is the average for the last completed calendar year. Forecasts are based on consensus estimates.

Generally the ratio of long-term bond yield to short-term interest rates is low when interest rates are expected to fall and bond prices expected to rise, and vice versa. Thus, an upturn in the ratio indicates increasing optimism and a downturn indicates increasing pessimism. As the ratio tends to fluctuate within a well-defined range, upturns from a low are cyclical buying opportunities and downturns from a peak are selling opportunities.

Please note that the value axis for this ratio,on the left hand scale, has been inverted, so that movements in the ratio point in the same direction as any changes in bond prices that they may indicate.

Owing to the conversion of legacy currencies into Euros, analysis is provided on a common bond market denominated in Euros, rather than for individual countries. Historical data is provided by creating synthetic GDP-weighted time-series for the component currencies, expressed in the European Currency Unit.

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