Question

. The relationship between yield and maturity on-the-run treasury securities on 7 January, 2009 is displayed in the following table.

Issue (Maturity)	Yield (%)
91 days	13.58
182 days	16.00
273 days	16.99
364 days	18.53
1 year	16.58
2 years	18.99
5 years	17.26
10 years	18.41
15 years	19.26

You are required plot this on a graph and interpret its shape.

Answer 1

Using the tabular data, we can construct a yield curve plot using a spreadsheet. Please refer the attached file for the shape of the curve. We can see that the curve is upward sloping for maturities up to 1 year and then suddenly inverts for a short time and then resumes its upward slope. It again slumps for 5 year maturity before again acquiring upward trajectories. As the yield curve reflects the expectations of the market about inflation and future short term rates we can say that general expectation in the market is for the short term rates in the future to rise except for 1 year and 5 year maturity bonds where the expectation appears to be mixed among the market participants.