Yield Curve
The yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
Also called: term structure of interest rates · Treasury yield curve · par yield curve
The US benchmark is the Treasury's Daily Par Yield Curve, published each trading day for maturities from one month to 30 years. It is built from indicative bid-side prices for the most recently auctioned Treasury securities, collected by the New York Fed near 3:30 pm, and interpolated so that a yield appears for each standard maturity even where no bond matures on exactly that date.
The shape carries the message. A normal curve slopes upward: lending for longer usually pays more, reflecting expected rate rises and a term premium for tying money up. A flat curve suggests little expected change. An inverted curve, with short rates above long ones, usually means markets expect the central bank to cut, often because they expect the economy to slow. A steep curve often follows cuts at the short end.
The short end is anchored by policy, in the United States the federal funds rate; the long end is set by markets, though central banks can reach it through quantitative easing. The curve shapes bank profitability, prices mortgages and corporate loans, and sets the income that a stablecoin issuer or payment firm earns on reserves held in Treasury bills.
In practice
There is a curve for every issuer and currency. Comparing one country's curve with another's mixes credit and currency risk with rate expectations.
Example
If 3-month bills yield 4.0 percent and 10-year notes 4.5 percent, the curve slopes upward by 50 basis points. If bills rise to 4.8 percent while the 10-year yield stays put, the curve has inverted.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Yield Curve, with more detail and background.
See also
- Inverted Yield CurveAn inverted yield curve is one where short-term interest rates are higher than long-term rates on bonds of the same issuer. In the United States it has been one of the more reliable warnings of recession, though not an infallible one.
- Term PremiumThe term premium is the extra yield investors demand for holding a long-term bond rather than rolling over a series of short-term ones for the same period. It cannot be observed directly and has to be estimated with models.
- Federal Funds RateThe federal funds rate is the interest rate at which US depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee sets a target range for it, and that range anchors short-term dollar interest rates worldwide.
- Treasury BillA Treasury bill is a short-term government debt security, usually maturing within a year, that pays no coupon. It is sold below its face value and repaid at face value, and the difference is the investor's return.
- Net Interest MarginNet interest margin is a bank's interest income minus its interest expense, expressed as a percentage of its interest-earning assets. It measures how much a lender earns on the gap between what it charges borrowers and what it pays for funds.
- Yield Curve ControlYield curve control is a central bank policy of targeting the yield on government bonds of a chosen maturity and buying whatever quantity is needed to hold it there. It caps borrowing costs further out along the yield curve.