Parallel Shift
What It Is:
A parallel shift in the yield curve occurs when the interest rates among bonds (or T-Bills) with different maturity dates change at the same rate.
How It Works/Example:
For example, if the yield on a five-year Treasury increases by five basis points, then the yields on all other Treasuries also increase by five basis points.
In the real world, parallel shifts are very uncommon. Shifts in the yield curve generally result in a yield curve that either steepens or flattens, indicating that interest rates did not change by the same amount.
Why It Matters:
An investor that can correctly forecast a parallel shift in the yield curve can profit by buying and selling the securities most affected by the shift.
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Cached on May 23, 2012, 9:35 am