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Humped Yield Curve

A humped yield curve is an interest rate curve in which medium-term interest rates are higher than both short-term and long-term rates. This shape deviates from the typical upward-sloping or downward-sloping curves. Humped yield curves often occur when investors expect economic conditions to change, such as a temporary rise in inflation or interest rates, leading to increased yields on medium-term securities.

Example

In a humped yield curve, 5-year Treasury bonds may offer higher yields than 2-year or 10-year bonds, reflecting investor concerns about future inflation or economic changes in the medium term.

Key points

• A yield curve where medium-term interest rates are higher than short- and long-term rates.

• Indicates expectations of changing economic conditions or inflation.

• Uncommon and often signals uncertainty in the market.

Quick Answers to Curious Questions

It suggests that investors expect economic changes, such as a temporary rise in inflation or interest rates, particularly in the medium term.

Unlike the typical upward-sloping curve, where long-term rates are higher than short-term rates, the humped curve peaks at medium-term rates.

Investors may face challenges in accurately predicting interest rate movements, leading to potential mispricing of bonds and other fixed-income investments.