Using the Yield Curve to Estimate Interest Rates in the Future

Yield curves on bonds and government provided securities are correlative, and are useful in projected future rates.

Learning Objectives

Understand the conceptual implications of bond yield rates is they pertain to broader market interest rates

Key Takeaways

Key Points

  • While the strict calculations involved in interest rate projections via bond yield curves come in a number of varieties (and complexities), it's useful to note that there are strong correlations between the two.
  • Yield curves combine the interest rate compounded over the duration of the debt security 's lifetime to demonstrate yield over time.
  • The financial stress index uses bond yield rates to determine projected future yield curves, which can indicate a variety of economic predictions (such as recessions and interest rate changes).
  • Market expectations theory uses existing projects for short-term interest rates based upon yield to project longer-term interest rates.
  • The Heath-Jarrow-Morton Framework is a well-established norm for predicting interest rates based upon various inputs (including yield curves). Understanding the conceptual inputs to this model gives some scope as to interest rate derivation.
Key Terms

  • recessions: Downturns in a given economic environment.
  • yield curve: A curve that shows the compounded interest rate applied to the value of the security over its lifetime.