Yield Curve

A yield curve is a graph that plots the interest rates (yields) of bonds with the same credit quality across different maturities. It shows the relationship between yield and time to maturity and is used as a benchmark for many interest rates in the economy and a predictor of economic conditions.

How the yield curve works

The curve is typically built from government securities (U.S. Treasury bills, notes, and bonds) because they share a common credit quality.
Common maturities shown are 3-month, 2-year, 5-year, 10-year, and 30-year Treasury securities.
The shape and slope of the curve reflect investor expectations about future interest rates, inflation, and economic growth.
Because bond prices move inversely to yields, shifts in the curve affect bond returns and borrowing costs across the economy.

Main types of yield curves

Normal (upward-sloping)

Short-term yields are lower than long-term yields.
Indicates expectations of economic growth and/or higher future inflation and interest rates.
A steep normal curve often accompanies strong growth expectations.
Example: 2-year 1.0%, 5-year 1.8%, 10-year 2.5%, 20-year 3.5%.
Strategy note: Investors may use “roll-down” or “ride the curve” strategies—holding intermediate bonds as they approach maturity to capture capital gains if the yield curve remains stable.

Inverted (downward-sloping)

Short-term yields exceed long-term yields.
Historically associated with investor expectations of lower future rates and economic slowdown; often viewed as a recession warning.
Occurs when demand for long-term safe assets pushes their yields below short-term yields.
Inversions are relatively rare but closely watched by market participants.

Flat

Yields are similar across maturities.
Signals uncertainty about future economic direction.
May include small humps at intermediate maturities.
Reflects investor indecision about whether growth or recession lies ahead.

U.S. Treasury yield curve

The Treasury yield curve (also called the term structure of interest rates) compares yields of short-term Treasury bills with long-term Treasury notes and bonds. It is widely used as a benchmark for pricing other debt, setting mortgage and bank lending rates, and assessing market expectations for the economy.

Yield curve risk

Yield curve risk is the potential loss resulting from changes in the shape or slope of the yield curve.
Because bond prices and yields move inversely, rising market interest rates reduce bond prices; falling rates increase bond prices.
Different maturities respond differently to rate shifts, so portfolio duration and positioning determine exposure.

How investors use the yield curve

Economic forecasting: An inverted curve can prompt defensive positioning; a steep curve can signal growth/inflation concerns.
Duration management: Investors adjust exposure to short- vs. long-term bonds based on curve shape and expected rate moves.
Relative value and trading: Traders exploit expected changes in slope (steepening/flattening) and implement strategies like curve steepeners/flatteners or rollover/roll-down strategies.
Allocation decisions: Yield curve signals can influence shifting into equities, cash, short-term bonds, or inflation-protected securities.

Key takeaways

The yield curve plots bond yields by maturity and is a fundamental indicator of market expectations about rates and the economy.
Normal, inverted, and flat shapes carry distinct economic implications (growth, recession risk, and uncertainty, respectively).
Investors monitor curve shape to manage duration, forecast economic conditions, and guide asset allocation decisions.
Changes in the curve create risk and opportunity because bond prices and yields move in opposite directions.