Yield Curve

The yield curve is a graphical representation showing the relationship between interest rates (yields) and bonds of equal credit quality but different maturity dates. The most commonly referenced is the U.S. Treasury yield curve, which compares 3-month, 2-year, 5-year, 10-year, and 30-year Treasury securities. A normal yield curve slopes upward, indicating higher yields for longer-term bonds due to greater risk. For example, 3-month bills might yield 2%, while 10-year notes yield 4%. An inverted yield curve (short-term rates higher than long-term) often predicts recession – this occurred before every U.S. recession since 1950. A flat yield curve suggests economic uncertainty. The shape reflects expectations about future interest rates, inflation, and economic growth. Bond traders use the yield curve for pricing bonds and identifying arbitrage opportunities. Central banks monitor it closely as it influences lending rates throughout the economy.