Drawing and interpreting the gilt yield curve
Question
Sketch the UK government yield curve as it stands today and comment on its shape.
Short answer
Draw yield against maturity from short rates out to 30 years, then explain the shape. An upward slope usually reflects expected rate rises and a term premium; a flat or inverted curve signals expected rate cuts, often ahead of a slowdown; humps reflect expectations at particular horizons. Link the short end to the Bank of England rate and the long end to inflation expectations and supply of gilts, and check the current shape before interviewing.
Adapted from Joshi, Denson & Downes, Quant Job Interview Questions and Answers, Q9.25, p.304; question and answer rewritten by SelfMadeQuant.com.
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