Yield Curve

The yield curve is a graphical representation of the different interest rates at various maturities.

There are different types of yield curves: spot, forward, par etc. No matter what type of yield curve, it represents different interest rates (at different maturities) at a single point of time.

Slope of the Yield Curves

In developed markets, yield curves are most commonly upward sloping with diminishing marginal increases in yield for identical changes in maturity; that is, the yield curve “flattens” at longer maturities. Because nominal yields incorporate a premium for expected inflation, an upward-sloping yield curve is generally interpreted as reflecting a market expectation of increasing or at least level future inflation (associated with relatively strong economic growth). The existence of risk premiums (e.g., for the greater interest rate risk of longer-maturity bonds) also contributes to a positive slope.

An inverted yield curve is somewhat uncommon. Such a term structure may reflect a market expectation of declining future inflation rates (because a nominal yield incorporates a premium for expected inflation) from a relatively high current level. Expectations of declining economic activity may be one reason that inflation might be anticipated to decline, and a downward-sloping yield curve has frequently been observed before recessions.

A flat yield curve typically occurs briefly in the transition from an upward-sloping to a downward-sloping yield curve, or vice versa.

A humped yield curve, which is relatively rare, occurs when intermediate-term interest rates are higher than short- and long-term rates.


Daily Treasury Yield Curve

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