A graph showing the relationship between yields of bonds of the same quality but different maturities. A normal yield curve is upward sloping depicting the fact that short-term money usually has a lower yield than long-term funds. When short-term funds are more expensive than longer term funds the yield curve is said to be inverted.
What is the Yield Curve?
The yield curve is a graph that shows the relationship between yields (or interest rates) and the length of time to maturity for a set of fixed-income securities, typically government bonds. The yield curve is a valuable tool for analyzing and interpreting changes in the interest rate environment and can provide insight into the current and future direction of the economy.
A typical yield curve plots yields on the vertical axis and maturity on the horizontal axis, and the curve shows the relationship between yields and maturities. There are three main types of yield curves: normal, inverted, and flat. A normal yield curve slopes upward, indicating that longer-term yields are higher than shorter-term yields, reflecting a market expectation of future interest rate increases. An inverted yield curve slopes downward, indicating that longer-term yields are lower than shorter-term yields, reflecting a market expectation of future interest rate decreases. A flat yield curve is when yields across maturities are similar, indicating that the market has a neutral outlook on future interest rate changes.
Changes in the shape of the yield curve can provide important signals about the economy and can impact various financial markets, including the bond market, the stock market, and the mortgage market.
