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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

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.

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.

Factors such as inflation expectations, central bank policies, and economic growth prospects influence the shape of the yield curve.