Bill Gross, Managing Director at PIMCO, released July’s Investment Outlook. Bill Gross’ articles are one of the most entertaining and informative pieces on the market. Obviously, I strongly recommend reading the entire piece here.

To summarize, though, Gross reasons that “Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum.” To also help you visualize the article, I created the depiction below, which is quite interesting (click the image to enlarge):

Fixed-income. A topic not widely covered in the blogosphere, but very important to understand.

Defined:

The Yield curve is a line that plots the interest rates, at specific time points, of bonds that have different maturity dates. The two metrics being calculated are: (i) the interest rate, and (ii) time.  You may have seen this graph before and not even known it. It’s a graph that shows the 3-month, 2-year, 5-year and 30-year interest rates for the U.S. Treasury debt. This curve is frequently used as the benchmark for many other debt-contingent markets like the mortgage industry and banking industry. It also is used as the “risk-free rate” when you’re using the CAPM model whether in valuation or in some other fashion. It’s also a good indicator for change in the economic, sociocultural and growth climate.

Video Overview:

Types of Treasury Debt:

• Treasury Bills: Short-term (1 month to a 11 months) loan/IOU
• Treasury Notes: 1 year to 10 year loan/IOU
• Treasury Bonds: 10 year loan/IOU

Why It’s Important:

The reason why the yield curve is brought up frequently revolves around the future speculation that can be reasonably drawn. What do I mean? The future interest rate, economic activity and needs of the government can be deciphered through rate changes.

Types of Yield Curves:

There are three main types of yield curve shapes:

Normal (above): A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time.

Inverted (above): An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession

Flat (above): (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition

The slope

The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.

Why It’s Misunderstood:

When you think of yield, you think of how much it will return, which is used interchangeably in society. This is true; however, don’t forget that the yield is stretched over the x-axis: time. That’s why there’s a curve. Very simple. A synonym for yield curve could be: the interest rate (return) stretched over time. That’s it. Simple.

Analysis:

So how can you draw critical analysis from the yield curve?

First, here’s a worthwhile read on drawing analysis from the yield curve: pdf download

Second, it’s worth reading PIMCO’s reports, here, where they discuss issues relating the fixed-income markets. It definitely gives one a 1,000 foot view perspective on launching a venture. Bill Gross’ recent Investment Outlook is particularly insightful, as well as entertaining: here

Last, here’s a video that’s insightful to grasp a bigger understanding:

Sources: Investopedia