Yield Curve
What Is the Yield Curve?
The yield curve is a graph that shows the relationship between interest rates and the maturity dates of bonds with similar credit quality, typically U.S. Treasury securities.
It illustrates how yields change for bonds with short-term, medium-term, and long-term maturities.
Why It Matters
The yield curve is widely used by economists and investors to understand expectations about economic growth, inflation, and interest rates.
Changes in the yield curve can signal shifts in economic conditions.
How the Yield Curve Works
The yield curve plots:
- bond maturity on the horizontal axis
- interest rates or yields on the vertical axis
There are three common yield curve shapes:
- Normal yield curve – long-term rates higher than short-term rates
- Flat yield curve – similar rates across maturities
- Inverted yield curve – short-term rates higher than long-term rates
An inverted yield curve is often seen as a possible indicator of economic slowdown or recession.
Example
If 2-year Treasury notes yield 3% while 10-year Treasury notes yield 4%, the yield curve slopes upward.
Yield Curve vs Interest Rate
- Interest rates represent the cost of borrowing.
- The yield curve shows how those rates vary across different maturities.
FAQs About the Yield Curve
Why do investors watch the yield curve?
It provides insights into economic expectations and financial market conditions.
What is an inverted yield curve?
It occurs when short-term interest rates exceed long-term rates.
Does the yield curve predict recessions?
Historically, inversions have sometimes preceded economic downturns.
Related Terms
