Inspite of technical analysis being the favorite of many, there are certain fundamentals that have retained their dominance. One such-yield curve-which facilitates bond pricing is explained in this article.
Any economics textbook will tell you that a change in the interest rates affects the price of stocks. The most notable interest rate that is flashed in the financial media is the short-term interest rate set by the central bank. However, to get a complete picture of the interest rate scenario, one has to analyze the behavior of all terms of interest rates, i.e., short, medium and long-term interest rates.
The yield curve is an important tool that gives an idea of the bond market. It simply shows the yields of different period similar-grade bonds, where the X-axis represents the period and the Y-axis represents the yield. Subtle changes in the shape of the yield curve foretell expectation of inflation rates and the direction of the stock market. |
