The yield elbow is the point on the yield curve with the highest interest rates, offering the best opportunity for a high rate of return. Different types of yield curves are affected by various factors, with a normal curve having a flat slope, a steep curve indicating an uptick in the economy, a flat curve showing mixed indicators, and an inverted curve indicating a worsening economy. Investors use these indicators to make buying and selling decisions.
A yield elbow is the point along the yield curve where the highest interest rates are achieved. In essence, yield elbow represents your best opportunity to realize the highest rate of return on a number of 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 buying and selling accordingly.
Since there are different types of yield curves, it is reasonable to assume that there are several different factors that can affect how a given curve works and where yield elbows will be created. For some stocks that are considered very stable, the yield curve is usually described as normal. A normal curve results in a relatively flat slope, with the yield elbow not much different from the long-term return projection.
Conversely, a steep yield curve will have a noticeable yield elbow. This type of curve results when there are a number of market indicators that predict that the economy is going to improve rather sharply in the near term. Investors who see such an uptick in the yield on their investments will find the yield elbow very attractive.
A flat curve indicates that market indicators are somewhat mixed regarding the short-term performance of the investment. Due to the lack of a clear projection, the yield elbow is likely to show a spike in asset performance. Typically, investors will choose to sit on their investments of this type until market indicators provide some insight into an uptrend or a downtrend.
With an inverted yield curve, there are a few factors that indicate that the overall economic condition is likely to worsen over time. The yield elbow will be somewhat obvious and show up much earlier along the slope of the curve. Typically, investors will try to sell while the interest rate is in the best possible position and use the proceeds to find stocks that have the most promise of generating a higher rate of return.
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