Yield curve
Also known as: term structure of interest rates
A yield curve is a graph plotting the yields of bonds of equal credit quality across different maturities. Its shape shows what the market expects interest rates and economic conditions to do, with the U.S. Treasury curve serving as the standard benchmark.
A yield curve plots maturity on the horizontal axis and yield on the vertical axis for a set of bonds that differ only in how long they run. The Treasury yield curve — from short bills through 2-, 10-, and 30-year issues — is the reference curve because Treasuries share the same credit quality, isolating the effect of time.
Three shapes matter. A normal (upward-sloping) curve pays more for longer maturities, compensating investors for the added interest rate and inflation (purchasing power) risk of waiting longer to get their principal back; this is the usual condition. A flat curve pays roughly the same across maturities and often signals a transition between economic regimes. An inverted curve pays more on short maturities than long ones, which happens when investors expect rates and inflation to fall and lock in long-term yields today. Inversions have historically preceded recessions.
The curve is a working tool, not just a picture. It anchors the pricing of mortgages, corporate debt, and floating-rate loans, and it drives strategy: managers position along the curve — barbell, bullet, and ladder structures — based on where they expect yields to move. Fed policy pulls hardest on the short end, while expectations of inflation and long-run growth dominate the long end.
Yield curve analysis appears on the SIE within economic factors and Federal Reserve policy, and in more depth on the Series 65 and Series 66, where it is paired with duration and volatility in the fixed income sections. The most heavily tested points are identifying each shape by description and knowing that an inverted curve reflects expectations of falling rates and slowing growth.
Key takeaways
- A yield curve plots yields against maturities for bonds of the same credit quality, most commonly U.S. Treasuries.
- A normal curve slopes upward because longer maturities carry more interest rate and inflation risk.
- A flat curve suggests a transition; an inverted curve pays more on short maturities and has historically preceded recessions.
- The curve prices mortgages, corporate debt, and floating-rate loans, and guides fixed income positioning strategies.
- The SIE, Series 65, and Series 66 all test yield curve shapes and their economic interpretation.