Market Aberration

Most of you must be thinking, what is this Market Aberration? Some finance guys and many professionals certainly know about the ups and downs of this aberration which is ultimately a relation of yield curve. But then let me tell you the behavioural aspects of this yield curve. First of all what is yield curve? It is nothing but the relationship between the yield and the maturity. Generally it is seen that when a money is invested for a longer period of time a higher rate of interest is earned as compared to short term investment. This scenario is called Normal yield Curve. Suppose the situation is opposite. ie. if an investor gets higher return on short term investment as compared to long term treasury bonds then what will happen? This scenario is called Negative Yield Curve (NYC) Inverted Yield. It emphasises a lower interest rate in future leads to prediction of economy recession.

Now how Negative yield curve affects companies or an individual?

Lets say an investor wants housing loan. If the scenario is NYC then it means bank pays higher rate of deposits. Henceforth, lending rates would also be high so variable rate of interest will be high. This means individual has to pay more amount of money to the bank which is very difficult for everyone. In the same way if we consider the company then company has to pay to investors so the profit margin falls for the companies that borrow cash for short-term rates and lend for long-term rates. Thus NYC has a great impact on the overall economy. In NYC generally Fixed rate of interest are having a great attention as compared to variable rate of interest.

I hope all the MBA students will be benefitted from this article. If at all any change is required, Please post your comments. I heartily welcomes...