What is the yield curve telling us?

Britain's steepening yield curve is just the thing to whip bankers up into a frenzy of excitement. But what is it, and what does it mean for you? Tim Bennett explains.

There is "nothing bankers like more than a steepening yield curve", says the MarketWatch blog, The Tell'. But why, and what do yield curves tell investors?

Yield curves are a way of comparing the total return (yield) available on similar bonds with different maturities (repayment dates). Let's take, say, three UK government gilts. The first is very short term and due to be bought back by the government in two years' time. In other words, investors will get the face value of the bond back then. The second will not be bought back for ten years, and the third has 30 years to run. The yield on each of these is the total expected annual return, made up of an interest payment (a coupon' in bonds jargon), and a capital gain (or loss, depending on what price you bought the bond at).

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.