Yield Curve

What Is Yield Curve?

The yield curve is a graph comparing the interest rates, or yields, on government bonds of different maturities, from short-term bills to long-term notes and bonds. In the United States it is built from Treasury securities issued by the U.S. Department of the Treasury. A normal yield curve slopes upward, with long-term yields higher than short-term yields, reflecting the extra compensation investors usually demand for lending money over longer periods. The most closely watched segment is the 2s/10s spread, the gap between the 2-year and 10-year Treasury yields. The shape of the curve summarizes what markets collectively expect about future interest rates, growth, and inflation, which is why it is treated as one of the most informative leading indicators of economic conditions.

Why It Matters

The yield curve matters because its shape distills the bond market's collective expectations into a single, easy-to-watch picture. When the curve is steep and upward-sloping, investors generally expect healthy growth; when it flattens or inverts, it can signal that markets anticipate slower growth or future interest-rate cuts. Because government bonds are actively traded and reflect the views of many participants, the curve updates continuously and often shifts before official data confirm a change, making it a leading indicator. Analysts and the Federal Reserve watch it closely for clues about where the economy and monetary policy may be heading. Its most famous signal is inversion, when short-term yields rise above long-term yields, a configuration that has historically preceded U.S. recessions, though never as a guarantee.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• The yield curve is a widely watched leading indicator — what does an "inverted" yield curve mean?
  Short-term interest rates are higher than long-term rates
• What is the "yield curve" generally comparing?
  Interest rates (yields) on government bonds of different maturities
• What does a "normal" (non-inverted) yield curve typically look like?
  Long-term yields are higher than short-term yields