Yield curve

A yield curve shows the relationship between the yield on securities and their maturities (how long it is until they can be redeemed at their face value).

Updated August 2018

The yield curve describes the differences in interest rates between government bonds of varying durations. It provides an overview of the market's outlook for interest rates, a key consideration for both bond and equity investors.

Everything else being equal, bonds with longer durations should have higher interest rates because the investor has to wait longer before they mature and there is a greater threat of inflation eroding the bond's value. So ten-year US Treasuries should yield more than those with a three-month maturity. The relationship between the two will also depend on expectations about future interest rates. So if people expect interest rates to rise rapidly in the future, the yield curve will be steeper than if everyone thinks that rates will remain the same.

Occasionally the yield curve become inverted, with longer-term bonds yielding less than short-term bonds. The lower future interest rates implied by this pattern should be good news for indebted companies, which would pay less interest. But since they suggest that the central bank will choose to cut rates in future, the inverted curve is interpreted as a harbinger of economic weakness.

Some traders argue that since the bond market anticipates economic news better than the stockmarket, an inverse yield curve is astrong sell signal for stocks. Ben Carlson of Ritholtz Wealth Management has found that, every time since 1970 when ten-year US Treasury bonds fell below those of two-year bonds, a recession was imminent.

Watch Tim Bennett's video tutorial: Beginner's guide to investing: the yield curve.

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
House prices in the UK are still surging – here’s why it’ll probably continue
Property

House prices in the UK are still surging – here’s why it’ll probably continue

The latest UK house price data shows no letup in the country’s booming property market, with the biggest yearly rise since 2014. And there’s no end in…
22 Apr 2021