Current and issue yield in stock market

The yield at which a bond is placed on the market when it is issued is the issue yield. If a bond is issued at a price of 100% of its nominal value and has an interest coupon of 5%, this also corresponds to an issue yield of 5%. If, on the other hand, the bond is issued below or above par, its issue yield is above or below the interest coupon.

In contrast to the issue yield, the current yield refers to the yield of already quoted (outstanding) bonds. In principle, a current yield can be calculated for each issuer and maturity segment. In practice, the current yields of government bonds, mortgage bonds and corporate bonds are particularly relevant.

Current yield and life insurance

The current yield is calculated daily by the Deutsche Bundesbank for various maturities and bond groups. The calculation has concrete effects on certain financial products - especially life and health insurance. The maximum interest rate for life insurance policies (usually referred to as the "guaranteed interest rate") may, by law, be a maximum of 60 percent of the current yield of ten-year government bonds. If the interest rate level falls, this therefore leads to falling guaranteed interest rates with some delay.

In 2000, the guaranteed interest rate for life insurers was still 4.00 percent. In 2014 it was only 1.75 percent - already in January 2014 a further reduction to 1.25 percent as of 01.01.2015 was discussed. At the same time, the maximum actuarial interest rate for health insurers was 3.50 per cent.

Yield curve

The yield curve reflects the relationship between maturities and yields on the bond market. A distinction is made between three constellations. A normal yield curve exists when yields rise with increasing maturity. A flat yield curve exists when yields are just as high "at the long end" as at the "short end".

In an inverse yield curve, long-term yields are lower than short-term yields. The yield curve reveals a lot about the expectations of market participants and is essential for the analysis of the bond market and the valuation of bonds. 

Characteristics of a normal yield curve

In a normal yield curve, the market demands higher interest rates for longer maturities, ceteris paribus. The higher interest rates include both a risk premium (the risk of default increases with maturity) and a premium for the investor's liquidity waiver in https://forexexness.org/personal_area/. For the nominal interest rate, inflation expectations play the biggest role in the normal yield curve because rising yield curves rarely occur in the run-up to a recession. Instead, rising interest rates and rising inflation rates are often expected, as is appropriate in the early stages of an economic upswing, for example.

Properties of an inverse yield curve

If an inverse yield curve exists, the market pays lower yields for longer maturities than for shorter maturities. In this constellation, market participants expect interest rates to fall significantly in the future and invest more in long-term bonds, which drives up their prices and, conversely, leads to falling yields. Inverse yield curves usually occur in the run-up to a recession, which leads to both falling interest rates (lower demand for credit, falling inflation, central bank interventions, etc.) and lower yields.

Flat yield curve

In a flat yield curve, yields at the long end correspond to yields at the short end. Flat yield curves rarely last long and often occur during a period of economic transition and uncertainty. Nevertheless, market participants tend to expect interest rates to fall, as the market always remunerates risk and liquidity, and yields at the long end are less favourable when they match those at the short end.