Yield Curve

A yield curve is a graphical representation of the interest rates (or yields) on bonds of varying maturities, typically government bonds, at a given point in time. The curve shows how bond yields change with different maturities, ranging from short-term to long-term bonds. A normal yield curve slopes upward, indicating that long-term bonds have higher yields than short-term bonds, reflecting higher risk over time. An inverted yield curve, where short-term yields exceed long-term yields, can signal an economic downturn.

Example

An upward-sloping yield curve suggests that investors expect higher returns for holding longer-term bonds due to the increased risk of inflation and other factors over time.

Key points

• A graphical representation of bond yields across different maturities.

• A normal yield curve slopes upward, indicating higher yields for long-term bonds.

• An inverted yield curve may signal economic recession or uncertainty.

Quick Answers to Curious Questions

What does a normal yield curve indicate about the economy?

A normal upward-sloping yield curve suggests investor confidence in economic growth, as long-term bonds offer higher yields to compensate for time and risk.

Why is an inverted yield curve considered a potential recession signal?

An inverted yield curve indicates that short-term yields are higher than long-term yields, which can suggest that investors expect economic downturns or lower future interest rates.