Definition
The yield curve is a line that plots interest rates of bonds (typically Treasury bonds) having equal credit quality but differing maturity dates. A normal yield curve slopes upward (longer maturities have higher yields) reflecting inflation and time-value-of-money risk. An inverted yield curve (short-term rates higher than long-term) has historically preceded recessions. A flat curve suggests economic uncertainty. The yield curve is one of the most watched economic indicators, with the 2-year/10-year spread particularly significant.
Example
When 2-year Treasury yields exceed 10-year yields (inversion), it has preceded every US recession since 1955. An inversion in 2019 preceded the 2020 recession. Investors closely monitor this relationship.
FAQ
What is Yield Curve?
A graph showing interest rates of bonds with equal credit quality but different maturity dates.
Why is Yield Curve important?
Yield Curve helps investors evaluate fixed income and make more informed decisions.