A yield elbow is the point along the yield curve that the highest interest rates are achieved. Essentially, the yield elbow represents the best opportunity to realize the highest rate of return on a number of different types of investments. For this reason, many investors will look toward any economic indications that the interest rate associated with a market yield curve is about to peak, and order their purchases and sales accordingly.
Because there are a number of different types of yield curves, it is reasonable to assume that there are several different factors that can impact how a given curve will function, and at what point yield elbows will be created. For some securities that are considered to be very stable, the yield curve is usually referred to as normal. A normal curve results in a relatively flat slope, with the yield elbow not being very different from the long-term projection of return.
By contrast, a steep yield curve will have an obvious yield elbow. This type of a curve results when there are a number of market indicators that predict that the economy is about to improve rather sharply over the short term. Investors who see an upswing of this type in the yield on their investments will find the yield elbow to be very attractive.
A flat curve indicates that the 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 elbow is likely to demonstrate much of a peak in the performance of the asset. Typically, investors will choose to sit on their investments of this type until market indicators provide some insight into either an upward or downward trend.
With an inverted yield curve, there are some factors that indicate that the overall economic condition is likely to get worse over time. The yield elbow will be somewhat obvious and show up much sooner along the slope of the curve. Generally, investors will attempt to sell while the interest rate is at the best possible position and use the proceeds to find securities that show more promise of generating a higher rate of return.
