I just deployed this Dash Plotly app “Yield Curves Visualisation” where you can explore a number of interactive charts illustrating Yield Curves. Here is a sneak peek to the visualisations.
This dash app contains interactive charts illustrating the risk-free Yield Curve for the US and the UK. It was written in Python using the graphing the open source library Plotly. If you like this project, please give it a star in GitHub ⭐️
What are Yield Curves and why do we care about them?
A yield curve is a graphical representation of the yields (interest rates) of bonds plotted against their respective maturities. In other words, it shows the relationship between the interest rates and the time to maturity for a range of bonds, typically from short-term to long-term.
Yield curves are important for several reasons:
- Economic Indicator: The shape of the yield curve provides insights into the market’s expectations about future economic conditions. A normal yield curve, where longer-term bonds have higher yields than shorter-term bonds, typically indicates expectations of economic growth. Conversely, an inverted yield curve, where short-term yields exceed long-term yields, often signals expectations of economic downturns or recessions.
- Monetary Policy: Central banks closely monitor yield curves as part of their monetary policy decision-making process. Changes in the yield curve shape may influence central bank actions, such as interest rate adjustments, in an effort to manage inflation, stimulate economic growth, or stabilize financial markets.
- Borrowing Costs: The slope of the yield curve can impact borrowing costs for businesses and consumers. In a normal yield curve environment, where long-term interest rates are higher, businesses may face higher borrowing costs for long-term investments. Conversely, an inverted yield curve could lead to lower long-term borrowing costs, which may incentivize investment and consumption.
- Investment Decisions: Investors use yield curves to make investment decisions and manage portfolio risk. For example, an inverted yield curve may prompt investors to shift towards safer assets or adjust their asset allocations to mitigate potential losses during economic downturns.
- Bond Market Dynamics: Yield curve movements reflect changes in bond market dynamics, including shifts in supply and demand for bonds of different maturities, inflation expectations, and investor sentiment. Understanding these dynamics can help investors anticipate market trends and make informed investment decisions.
Overall, yield curves serve as valuable tools for investors, policymakers, and economists to gauge economic conditions, assess monetary policy implications, and make informed financial decisions.