In the bond market, the forward curve is a graphical representation that roughly reflects where traders see interest rates in the future.
It's derived from current bond prices, swaps, or futures.
If the curve is upward sloping, it reflects market expectations for higher interest rates in the future.
If the curve is downward sloping, it reflects market expectations for lower interest rates in the future.
The forward rate curve is helpful in a number of ways. Among other things, it helps the mortgage market:
- Anticipate future potential interest rate movements
- Manage risk
- Compare the fair value of different mortgage terms