DEFINITION OF ‘YIELD ELBOW’
The point on the yield curve indicating the year in which the economy’s highest interest rates occur. The yield elbow is the peak of the yield curve, signifying where the highest interest rates occurred.
The yield curve is the graphical relationship between the yield and maturity of bonds with different maturities and equal credit quality. Yield curves play an important role in the pricing of bonds, and are referenced by investors and analysts to identify opportunities for realizing high rates of return on certain investments. The yield elbow typically occurs when there are concerns about current or future inflation, and can correspond to low prices for bonds.
BREAKING DOWN ‘YIELD ELBOW’
Three main types of yield curves exist, including normal, inverted and flat. A normal curve is one where longer maturity bonds have a greater yield compared with shorter-term bonds because of the risks associated with time. An inverted yield curve indicates an interest rate environment where the shorter-term yields are higher than the longer-term yields – a possible indicator of an upcoming recession. A flat yield curve happens when the shorter- and longer-term yields are close, indicating a potential economic transition. On any type of curve, the yield elbow is the highest point.