What is the yield curve?
Short answer
The yield curve plots the yields of bonds with similar credit quality, usually government bonds, against their time to maturity. Its shape shows how the market prices borrowing for short versus long periods.
How it is drawn
Take government bonds that mature in 3 months, 2 years, 10 years, 30 years and so on, and plot each one’s yield on a chart with maturity on the horizontal axis. Joining the points gives the yield curve. The US Treasury curve is the most closely watched, and most countries with a liquid government bond market publish their own.
Common shapes
A normal curve slopes upward: longer bonds yield more than shorter ones, which usually reflects compensation for tying money up longer. A flat curve has similar yields across maturities. An inverted curve has short-term yields above long-term yields.
The shape reflects expectations about future policy rates and inflation, plus a term premium and the supply of and demand for bonds. No single factor explains it.
| Shape | Short vs long yields | Common reading |
|---|---|---|
| Normal | Long above short | Compensation for time; mild growth expectations |
| Flat | About equal | Transition; mixed expectations |
| Inverted | Short above long | Markets expect policy rates to fall later |
Why people watch inversions
Researchers have noted that inversions of the US Treasury curve preceded several past US recessions. The relationship is not exact, the lead time has varied, and it is not a forecast. Central bank policy and unusual bond demand can distort the curve.