What is a 'Yield Elbow'

A yield elbow is the point on the yield curve indicating the year in which the economy experienced the highest interest rates. The yield curve is the graphical relationship between the yield and maturity of bonds with different maturities and equal credit quality, at a specific point in time.

BREAKING DOWN 'Yield Elbow'

The yield elbow is the highest point of the yield curve, signifying where the highest interest rates occurred.

A yield curve involves a particular, individual type of bond. The graph is an illustration in which the yields of these similar-quality bonds are plotted against their yields, along the spectrum from shortest to longest. This can show how short-term yields compare to longer-term yields.

Yield curves play an important role in the pricing of bonds. Investors and analysts reference yield curves to identify opportunities for realizing high rates of return on certain investments.

The yield elbow typically occurs when there are concerns about current or future inflation, and can correspond to low prices for bonds. Predicting a yield elbow can be challenging, since yield curves are constantly changing, and can fluctuate due to a variety of factors that may be difficult to anticipate.

Yield Elbow and Types of Yield Curves

One of the most commonly reference yield curves compares U.S. Treasury bonds with a three-month, two-year, five-year, and 30-year maturity term.

Three main types of yield curves exist, including normal, inverted and flat. A normal curve is one where longer maturity bonds have a greater yield compared with shorter-term bonds because of the risks associated with time. This is sometimes also referred to as a “positive” yield curve.

An inverted yield curve indicates an interest rate environment where the shorter-term yields are higher than the longer-term yields, which is a possible indicator of an upcoming recession. This type of curve can also be called a “negative” yield curve.

A flat yield curve happens when the shorter- and longer-term yields are close, indicating a potential economic transition.

On any type of curve, the yield elbow is the highest point. Economists cite the Federal Reserve as having a strong influence on the yield curve. When the Federal Reserve raises interest rates, investors tend to become more confident about inflation being kept under control for the most part, which means investors feel more secure about longer-term maturities. If the yield curve remains relatively flat even though the economy seems to be booming, this can signal that investors are not confident the positive trend will last long.
 

RELATED TERMS
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set ...
  2. Flat Yield Curve

    The flat yield curve is a yield curve in which there is little ...
  3. Curve Steepener Trade

    Curve steepener trade is a strategy that uses derivatives to ...
  4. Positive Butterfly

    A positive butterfly is a non-parallel yield curve shift in which ...
  5. On-The-Run Treasury Yield Curve

    The on-the-run Treasury yield curve is derived from on-the-run ...
  6. Bear Steepener

    A bear steepener is the widening of the yield curve caused by ...
Related Articles
  1. Investing

    Bond yield curve holds predictive powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  2. Investing

    The impact of an inverted yield curve

    Understand how the relationship between short- and long-term interest rates contributes to an inverted yield curve – a noteworthy economic event.
  3. Investing

    One Thing The Yield Curve Says About Stocks

    Contrary to media hype, a flattening yield curve does not mean a recession is coming soon.
  4. Insights

    Is a Recession Coming? Watch the Yield Curve

    The yield curve can be an indicator of which way the economy is heading.
  5. Investing

    Charles Schwab: Flattening Yield Curve Isn't Reason to Worry About Stocks

    While stock investors have plenty of worries, the flattening yield curve shouldn't be one of them, says Charles Schwab's Liz Ann Sonders.
  6. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  7. Insights

    Four Scenarios: Fed Policy, the Yield Curve and Recessions

    If you were to compile a list of the most effective recession predictors, the term spread, or difference between short and long-term interest rates, would likely be at the top of that list.
  8. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  9. Insights

    Bank Stocks Set to Shine as Fed Tapering Begins

    As the Fed embarks on a monumental shift in policy, Goldman Sachs sees value in financials.
  10. Investing

    3 Risks U.S. Bonds Face in 2016

    Learn about the major risks for the bond market in 2016; interest rate increases, high-yield bond volatility and a flatter yield curve may be issues.
RELATED FAQS
  1. What is the difference between term structure and a yield curve?

    Understand the difference between the term structure of interest rates and a yield curve, if any. Learn what the yield curve ... Read Answer >>
  2. What is the current yield curve and why is it important?

    Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... Read Answer >>
  3. What is the difference between yield and return?

    Return is the financial gain or loss on an investment. Yield measures the income, such as interest and dividends, from an ... Read Answer >>
  4. Which economic factors impact Treasury yields?

    Learn about the economic factors that impact Treasury yields. These yields are the benchmark yield for debt notes around ... Read Answer >>
  5. What does a negative bond yield mean?

    Learn what it means when a bond has a negative yield and what circumstances must arise for the yield to be negative when ... Read Answer >>
  6. How are bond yields affected by monetary policy?

    Learn about how bond yields are affected by monetary policy. Find out how this determines the risk-free rate of return and ... Read Answer >>
Trading Center