Yield Curve
A graph that plots the yields of bonds with equal credit quality but different maturity dates. The shape of the curve provides insight into future interest rate expectations and economic conditions.
The yield curve is one of the most closely watched indicators in financial markets. It typically plots U.S. Treasury yields from short-term (3-month) to long-term (30-year) maturities and serves as a barometer for economic expectations.
Yield Curve Shapes
- Normal (upward-sloping) — Longer-term bonds yield more than shorter-term ones, reflecting the added risk of lending money for longer periods. This is the most common shape and signals economic expansion.
- Inverted — Short-term yields exceed long-term yields. An inverted curve has preceded every U.S. recession in the past 50 years, making it a powerful warning signal.
- Flat — Yields are similar across maturities, often occurring during transitions between normal and inverted curves.
The yield curve directly affects bond pricing and bond vs. stock allocation decisions. Understanding how bond duration interacts with yield curve shifts is essential for fixed-income investors.