Macro
Yield Curve
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The yield curve is a line graph that plots the yields on debt of the same credit quality across a range of maturities, most commonly U.S. Treasuries from one month to 30 years.
What the yield curve shows
The SEC's Investor.gov glossary defines the yield curve as a line graph that shows the relative yields on debt over a range of maturities from three months to 30 years, used to evaluate bond markets and interest-rate expectations. In the United States the reference curve is the Daily Treasury Par Yield Curve, built from indicative bid-side quotations obtained by the New York Fed at or near 3:30 p.m. each trading day. Per the Treasury's methodology, the inputs are the most recently auctioned 4-, 6-, 8-, 13-, 17-, 26- and 52-week bills, the 2-, 3-, 5-, 7- and 10-year notes and the 20- and 30-year bonds. A curve that rises with maturity is called normal, one that is roughly level is flat, and one where short yields exceed long yields is inverted.
Hypothetical example: the 2-year note yields 3.8% and the 10-year 4.2%, so the 10-year minus 2-year spread is +0.40%, a normal slope. See Treasury yields and duration.
Why investors watch the slope
The slope summarizes what the market expects short-term rates to do. Long yields tend to sit above short yields when investors demand extra compensation for lending longer and expect rates to hold or rise; they fall below short yields when the market expects the central bank to cut. Fed economists note in a 2018 research note that low term spreads have shown statistical power for predicting historical recessions over the following year, but argue that a shorter "near-term forward spread" captures that information better and that negative readings do not cause recessions; they impound expectations market participants have already formed. The curve also matters mechanically: banks borrow short and lend long, so a flat or inverted curve compresses lending margins while a steep curve widens them. Bond investors use it to choose maturities.
Hypothetical example: the 2-year rises to 4.5% while the 10-year stays at 4.2%, so the spread becomes −0.30% and the curve inverts. See yield curve inversion.
Example
Hypothetical: with the 2-year Treasury at 3.8% and the 10-year at 4.2%, the 10-year minus 2-year spread is +0.40%, a normal upward slope; a 2-year yield of 4.5% would invert it to −0.30%.
Yield Curve — FAQ
What is Yield Curve?
The yield curve is a line graph of yields on debt of the same credit quality across maturities, most often U.S. Treasuries from one month to 30 years. Its slope reflects interest-rate expectations.
Can you give an example of Yield Curve?
Hypothetical: with the 2-year Treasury at 3.8% and the 10-year at 4.2%, the 10-year minus 2-year spread is +0.40%, a normal upward slope; a 2-year yield of 4.5% would invert it to −0.30%.
What does an inverted yield curve mean?
Short-term yields are higher than long-term yields, which usually reflects market expectations that the central bank will cut rates. Federal Reserve researchers note that low term spreads have preceded past recessions but stress that inversions do not cause them; they reflect expectations that market participants have already formed.
Which maturities are on the Treasury yield curve?
The Treasury's par yield curve uses the most recently auctioned 4-, 6-, 8-, 13-, 17-, 26- and 52-week bills, the 2-, 3-, 5-, 7- and 10-year notes and the 20- and 30-year bonds. Quotations are indicative bid-side prices collected by the New York Fed at or near 3:30 p.m. each trading day.
What is a normal yield curve?
One that slopes upward, with yields rising as maturity lengthens. Lenders typically demand more yield to tie up money for longer and to bear more price sensitivity to rate changes. A flat curve shows little difference across maturities, and an inverted curve shows short yields above long yields.
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