Yield Curve

A yield curve is a line used to help determine interest rates of interest rates for a specific bond, differentiated by contract lengths.

This is useful for contrasting maturity dates, for example 1 month, 1 year, etc.

In particular, yield curves help underscore the relationship between interest rates or borrowing costs and the time to maturity.

Some of the best examples of this include US Treasury Securities, which are among some of the most observed worldwide by traders.

By determining the slope of yield curves, it is possible to plot or predict future interest rate changes.

There are three types of yield curves that are primarily studied, classified as normal, inverted, or flat.

Why are Yield Curves Important?

Yield curves like other benchmarks help investors and analysts ascertain more information about specific constructs affecting financial markets.

For example, a normal or upward sloping curve points to economic expansion. Expectations of yields becoming higher in the future help attract funds in shorter-term securities with the hopes of purchasing longer-term bonds later, for a higher yield.

The opposite is true in the case of an inverted or downward sloping curve, which traditionally points to an economic recession.

If yields are expected to eventually be lower, investors opt to purchase longer-term bonds to help price in yields before further decreases occur.

Subsequently, these are predictive of economic output and growth and are thus instrumental in financial analysis.

These curves are also utilized primarily as a barometer for other forms of debt in a market, including bank lending rates, mortgage rates, and other benchmarks.

The most reported yield curves deal with US Treasury debt, comparing the 3-month, 2-year, 5-year, 10-year and 30-year intervals. This information is published daily.