The economic barometer
The graph is charting 90 day bank bills (short terms rates) against ten year bonds (long term rates). For the US, the federal funds rate, to the 10 year bond. The difference between the two can be used as a guide for the nation’s economic health and more importantly (sometimes) the direction of the economy.
When the short term interest rate is below the long term rate, the yield curve is said to be positive. A positive yield curve is indicating an economy that will grow (or continue growing) in the near future.
When short term interest rates are higher than long term rates the yield curve is said to be negative. A negative yield curve is indicative that the economy has been growing strongly in the past.
These days, and certainly since the second world war, Reserve Banks have been active with monetary policy in setting the level of interest rates in accordance with their set policy objectives. It probably goes without saying that when the economy is booming, interest rates generally are increased, to slow inflation and / or reign in business activity. The yield curve goes negative. The opposite condition arises where the economy has been in recession, coming out of recession, or in the middle of the decade cycle, short term interest rates have been lowered, as a policy objective to increase business activity.
Hence this can give us a barometer of economic conditions.
The vertical lines represent past recession dates. The yield curve’s most valuable use it to read it in conjunction with the position of the real estate cycle.