Yield Curve

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What is a 'Yield Curve'

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

Yield Curve

BREAKING DOWN 'Yield Curve'

The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.

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RELATED FAQS
  1. What are the different formations of yield curves?

    Find out more about the yield curve and yield curve formations, what yield curves measure and the three main types of yield ... Read Answer >>
  2. What is the current yield curve and why is it important?

    Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... Read Answer >>
  3. Where on the Internet can I find yield curves over various periods?

    Find out where to locate reliable yield curve information on the Internet, including the U.S. Department of the Treasury ... Read Answer >>
  4. What is the correlation between term structure of interest rates and recessions?

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  5. How can I create a yield curve in Excel?

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  6. A diagram of yields on debt instruments shows that short-term interest rates are ...

    The correct answer is a. An inverted—or negative—yield curve is an unusual situation that generally indicates an unhealthy ... Read Answer >>
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