Applications of the yield-curve Analysis
1. It is useful to government official responsible for stabilization policy.
2. Bond-portfolio manager responsible for the selection of an appropriate maturity composition.
Case study 1: Operation twist- An attempt by the monetary authorities to alter the shape of the yield curve.
The U.S. was faced with:
High domestic unemployment
Chronic balance-of-payments deficit
Suggestion: change the maturity structure of government debt so as to raise the short rate and lower the long
Higher short rates were expected to encourage short-term capital inflows and thus improve the balance of
Lower long-term rates were expected to encourage corporate investment and stimulate economic recovery
Yield to maturity %
Years to maturity
1 2 3 4
The Federal Reserve attempted to implement this policy by retiring long-term bonds and replacing them