Lecture 10 Flashcards
(13 cards)
Beveridge Curve
Related to unemployment rate and vacancy (job opening) rate; provides a better indicator of where we are on the business cycles; How tight the market is
Phillips Curve
Relationship between unemployment rate and inflation rate; Shows a less clear picture of whether such trade off between inflation and unemployment exists looking at long horizon (holds around a short period of time)
How important is the labor market in determining the monetary policy?
Extremely important; Used 21 times in meeting minutes; Used by Federal Open Market Committee
Yield Curve- Normal Times
Short term rate < Long term rate;
Investors are more willing to accept lower return in the short term in exchange for liquidity
Yield Curve- Not Normal Times
Short term rate > Long term rate
What are these yield rate (%)?
It is the daily market transaction price of investors and institutions buying and selling treasury securities and bonds; It reflects the daily market price of treasury of each maturity
What is yield curve?
A graph that shows the price (yield) of T-securities at each maturity as traded in a given day
Yield Curve Inversion Phenomena- Normal Times
Demand for ST Bonds- Increase
Price ST Bonds- Increase (investors prefer liquidity)
Yield ST- Decrease
Demand for LT Bonds- Decrease
Price for LT- Decrease
Yield for LT- Increase
Why would there be an inverse relationship between stocks?
When market is heading towards a recession, then investors sell stock (stock goes down), and then holds more bonds. Bond price increases, bond yield falls; When the stock market is down, bonds will perform relatively better
Yield Curve Inversion Phenomena- Anticipating Recession
Demand for ST- decrease
Price for ST bond- decrease (as liquidity need to decrease)
Yield ST- increase
Demand for LT- increase
Price for LT- increase
Yield for LT- decrease
(Investors prefer safety)
Why does inverted yield curve mean?
In normal times, 10 yr should have higher yield than 2 yr. If the difference is negative, it means 2 yr has higher yield than 10 yr. The negative difference preceded every single recession in the past; Yield curve provides the signal of what the market is expecting
Credit Default Swap (CDS)
Insurance against a default of a bond; It takes an insurer to insure the insured, who also needs to pay for this ‘insurance’ service
What is the difference between treasury yield and corporate bond yield?
Spread; The riskiness of different classifications; Spread rises in times of higher risk (during recession); Move farther apart in times of recession
