Euro Area Central Government Bonds Yield Curve
What is it?
The Euro Area Central Government Bond Yield Curve, released by the European Central Bank every working day, is based on a selection of the most liquid and representative AAA-rated Euro-denominated bonds issued by Euro Area Central Governments covering maturities from three months to 30 years. The yield curve, also known as term structure of interest rates, describes relationships between yield and maturity of bonds. The graph also show yield curve values for last month and last year. The bond and price information are provided by EuroMTS Ltd and the ratings are providing by Fitch Rating.
Why do I care?
A yield curve represents the relationship between the cost of borrowing money (the interest rate) and the time to maturity of bonds with a similar risk profile at a certain moment in time. Since AAA-rated central government bonds are considered to reflect the lowest credit default risk, a yield curve computed on the basis of these bonds provides a floor for borrowing costs in the Euro area and thereby may constitute a useful benchmark for assessing rates for other types of bonds with the same maturities. The Euro area yield curve can also assist in gauging market expectations of economic and financial activity over a medium to long term horizon.
The information contained in a yield curve reflects how the AAA-rated Euro-denominated bonds issued by Euro Area Central Governments included in the data are being priced by the financial markets. When buying and selling bonds, investors include their expectations of future inflation, real interest rates and their assessments of risks. Thus this information may help provide an indication of the path of future financing costs and possible implications for the financial system.
Yield curves tend to move on a daily basis and shift up and down as interest rates rise and fall. A positive slope on a yield curve, meaning that yields rise as maturity lengthens, tends to reflect investor expectations that the economy will grow in the future. Long term investments have higher yields because investors are risking their money for longer periods of time. Steep yield curves, where yield for longer maturity bonds are significantly above those for short maturity bonds, may be seen at the beginning of economic expansions or the end of recessions. Flat yield curves may be observed when all maturities have similar yields and may suggest uncertainty in the economy. A humped yield curve may be observed when short term and long term maturity bond yields are more or less the same and medium term yields are higher. An inverted yield curve occurs when long-term yields fall below short-term yields and investors are getting better returns with short-term investments. An inverted yield curve potentially may signal an economic decline or recession.