"Yield Curve of Short and Long Term Interest Rates"

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What is a Yield Curve

You always knew that money had time value, and now you know that this is important in income investing.

And you know that money in the near future is worth more than money in the far future.

But how much more?

That depends upon interest rates.

The Yield Curve is Tracked by Economists

That is what the graph of interest rates looks like.

The vertical line is interest rates running from 0% on up.

The horizontal line is time periods from 90 days to 30 years.

You Make Yield Curves by Plotting the Interest Rates for Treasury Securities

90 day Treasuries will pay the lowest interest.

30 year Treasury bonds will pay the highest interest.

Sometimes the economy gives money in the present far less than other times.

Usually Long Term Money Pays a Higher Interest Rate Than Short Term Money

Other times, the yield curve goes close to flat.

When you can make almost as high a yield by investing in a 90 day Treasury as you can in a 30 year Treasury bond, that means that currently interest rates are very high. You'd be foolish to tie up your money in a 30 year bond when you can get almost as much money over the next 90 days.

Sometimes the yield curve is actually inverted -- you can get a higher rate of interest in the short term than the long term.

That's generally considered bad for the economy and the stock market, since it reflects that people have a lot of fear in the present. They are so fearful of risk in the present that they're not even thinking about investing long term.

The yield curve is probably not something you'll want to pay attention to every day. However, it does affect fixed income investing because they are so dependent upon current prevailing interest rates.

You won't pay attention to the yield curve, but it will affect your pocket book, for better or worse.

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