Yield Curve

To draw a yield curve, you plot the yields of bonds against their time to maturity, for example from three months to thirty years. The shape of the curve reveals how investors view the future.

Normally, the curve slopes upwards: longer-term bonds pay higher yields than short-term ones, because investors want extra reward for tying up money for longer and for the greater uncertainty involved. For example, two-year government bonds might yield 3% and ten-year bonds 4%.

Sometimes the curve becomes flat, with similar yields across maturities, or inverted, with short-term yields higher than long-term yields. An inverted curve often appears when investors expect interest rates to fall in the future, typically because they expect the economy to slow. In several major economies, inverted yield curves have often come before recessions, which is why they are closely watched.

The yield curve also affects everyday finance. Banks often borrow short-term and lend long-term, so the gap between short and long rates influences their profits and lending.