Posted in Finance, Accounting and Economics Terms, Total Reads: 224
Definition: Negative Butterfly
Negative butterfly refers to a transformation in the yield curve in which medium-term yields undergo change by a greater value than short-term and long-term yields. One should note that the negative butterfly is the exact opposite of the positive butterfly, in which medium-term rates change less than the short-term and long-term rates.
The yield curve can be seen as a graph plotting the yields of same-quality bonds against their maturities, starting from shortest to longest. It helps investors at a quick look to differentiate the yields offered by short-term, medium-term and long-term bonds. The butterfly is one of three basic types of changes in the yield curve (the other being the parallel shift and the twist). The charts below given are three examples of these patterns.
In practicality, changes normally do not affect all areas of the yield curve similarly, making the butterfly pattern more general than the parallel shift, for example. Very often, the yield curve becomes steep and shifts downward or flattens and shifts upward. As a consequence, the yields of some particular types of bonds normally change more or less than other types of bonds, and when considering case of the negative (or positive) butterfly pattern, this leads to or accentuates a broad peak in the yield curve.