The yield knee is the point on the yield curve where the highest interest rates are reached, and investors look for economic indications to predict when it will peak. Different types of performance curves can affect the yield knee, with a normal curve resulting in a relatively flat slope, a steep curve indicating short-term economic improvement, a flat curve showing mixed market indicators, and an inverted curve indicating a worsening economic situation. Investors will adjust their purchases and sales accordingly.
A yield knee is the point along the yield curve at which the highest interest rates are reached. Essentially, the yield elbow represents the best chance to earn the highest rate of return on several different types of investments. For this reason, many investors will look for any economic indication that the interest rate associated with a market yield curve is about to peak, and order their purchases and sales accordingly.
Because there are several different types of performance curves, it is reasonable to assume that there are several different factors that can affect how a given curve will perform, and at what point performance knees will be created. For some securities that are considered to be very stable, the yield curve is generally referred to as normal. A normal curve results in a relatively flat slope, with a yield elbow that is not much different from the long-term return projection.
Conversely, a steep yield curve will have an obvious yield knee. This type of curve occurs when there are a number of market indicators that predict that the economy is about to improve considerably in the short term. Investors who see such an increase in their investment returns will find the yield elbow very attractive.
A flat curve indicates that market indicators are somewhat mixed about the short-term performance of the investment. As a result of the lack of a clear projection, the yield knee is likely to show much of a spike in the asset’s return. Investors will generally choose to sit on their investments of this type until market indicators provide some idea of an up or down trend.
With an inverted yield curve, there are a few factors that indicate that the overall economic situation is likely to worsen over time. Yield knee will be obvious and show up much earlier along the slope of the curve. In general, investors will try to sell while the interest rate is in the best possible position and will use the proceeds to find securities that are more likely to generate a higher rate of return.
Smart Asset.
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