Yield Curves
A yield curve is simply a graph that plots bond yields against their length of time to maturity. The curve will show whether short-term interest rates are higher or lower than long-term rates.

  • Normal Yield Curve
    • Most of the time, the yield curve will be positively sloped, which means lower interest rates are correlated with shorter maturities.
    • As maturity lengthens, interest rates increase.
    • For instance, if two-year Treasury notes yield 3%, five-year Treasury notes yield 4% and 10-year Treasury bonds yield 5.5%, then the yield curve will be sloped positively. This would be a normal yield curve.
    • The following diagram is of a normal yield curve, exhibiting a positive slope:

Figure 9.1: Normal Yield Curve

  • Inverted (or Negative) Yield Curve
    • Occurs when there is weak demand for bonds with short maturities, which drives yields up. A strong demand for long-term bonds drives these yields down.
    • An inverted yield curve means short-term interest rates are higher than long-term rates. This is an unusual situation, but it does happen.
    • An inverted yield curve may be an indication of economic decline.
    • For instance, an inverted yield curve would result if the two-year Treasury note yielded 3%, the five-year Treasury note 2.75% and the 10-year Treasury bond 2.5%.
    • This would occur if rates were high but expected to fall.
    • Consider the following diagram for a visual interpretation of an inverted yield curve:

Figure 9.2: Inverted Yield Curve



  • Flat Yield Curve
    • Occurs where yields are the same for short, intermediate, and long-term bonds.
    • This type of curve is a rare occurrence.

The flat yield curve is essentially a "flat" line.


Time Value of Money: Present and Future Value

Related Articles
  1. Investing

    Will an Inverted Yield Curve Happen Again?

    Explore the causes of inverted yield curves, their frequency, their accuracy in forecasting recessions and whether this type of event can happen again.
  2. Investing

    Understanding the Inverted Yield Curve

    An inverted yield curve occurs during the rare times when short-term interest rates are higher than long-term interest rates.
  3. Investing

    Trade Bond ETFs Using Yield Curves

    Different types of yield curves provide important insights for trading bond-based securities.
  4. Investing

    The Impact Of An Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.
  5. Insights

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  6. Insights

    Understanding The Treasury Yield Curve Rates

    Treasury yield curves are a leading indicator for the future state of the economy and interest rates.
  7. Investing

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
  8. Investing

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  9. Investing

    Bond Yield Curve Holds Predictive Powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  10. Investing

    What’s the US Yield Curve Signaling?

    In recent weeks, the difference in yields between 10-year and 2-year U.S. Treasuries has hit post financial crisis lows, as evident in the chart below.
Trading Center