Hello everybody,In the normal case, a yield curve has an upward slope due to risk aversion, what I can't understand is why the curve is concave, is there a good reason for that? Or is just for not having forward curves with too strong upward slope?Thanks in advance!

if the curve is downward sloping than rate cuts are expected and in general a slower economy

Cuts being priced, as dave says...

Thanks, but in fact I already knew that, what I don't know is why the curve is concave when the slope is upward (I can't find the answer anywhere)?

QuoteOriginally posted by: adernosThanks, but in fact I already knew that, what I don't know is why the curve is concave when the slope is upward (I can't find the answer anywhere)?I dont understand

I understand the slope (upward if the economy is normal or downward if the economy is slower) but why is there concavity when the econonomy is normal, ie why yield are growing slower with maturity?Is there a simple explaination?

'Cause that's the natural shape of things when you price cuts.

so you mean that a upward sloping curve is pricing rate cuts,i.e. a future recession, in its longer maturities.That's it?

No, it's just when you price cuts in the front end and then you have the natural risk premium take over further out, the shape it naturally produces is this sort of funny concave one.

Also, if you had an upward sloping yield curve that was linear or convex it would send long rates off to infinity (although I'll grant you that you could have more complicated forms). Most well-behaved theoretical models have the long forward rates converge to a constant.

Ok, thank you very much Bearish, Martinghoul and Daveangel

Some of the concavity also stems from structural demand for long term fixed income assets (20Y+) such as from pension funds and/or insurance companies. The effect of this structural demand varies considerably by country depending on regulations and institutional preferences, but in most cases this can result in lower long maturity yields ...

Some of the humpness at the long end of the curve stems from convexity. Convexity means that the price reaction to changes in yields is non linear. More precisely a rise in yields by e.g. one percentage points results in a smaller loss than the gain from an equal fall in yields. Convexity thus protects the investor from volatility. As convexity rises with time to maturity investors can actually demand less yield from a longer bond (e.g. 30Y) than from a shorter bond (e.g. 29Y). This makes the yield curve hump at the back end and explains in part the concave shape. HTH

Right, gents, I don't want to split hairs, but I would like to mention that the last two responses were talking about the convexity of the curve. That wasn't the original question. So yes, convexity in the long end is an interesting subject and all that, but it's got nothing to do with the OP's question.

You are quite right Martinghoul! sorry for being OT.