Question

Explain how the yield curve would behave, generally, during the Covid -19? [Hint: Observe the yield curve in many different countries and share your views

Answer 1

During the time of Covid-19, or more generally whenever there is global negative economic shock (like the 2008 recession), the yield curve is inverted. This means that the long term government securities have a lower yield as compared to the short term ones - contrary to standard economic theory as longer term bonds must pay higher return to compensate fro more risk. But during the pandemic, markets have been hit terribly and the investors runn for safe haven. The government securities, and especially the long v term US treasury bonds are considered the safest of assets and their demand shoots up. This leads to a decline in the level of yields on the long term treasury bonds and the gap between the yields on short and long-run treasury declines and can even become negative.