Yield Curve, Definition

The yield curve is a graph showing the range of interest rates available to investors. It is a graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates. Under normal circumstances, the longer the maturity, the higher the yield. This is because an investor expects a premium for taking on more risk by holding the bond for longer.

The longer the maturity, the greater the reaction will be to news on inflation and the greater the market volatility.

The normal yield curve rises to the right, where short term interest rates are lower than long term rates. The flat yield curve is where short term yield are almost the same as long term yields. This can suggest a slowing of the economy or that the Fed has been raising short term rates. An inverted yield curve shows long term rates falling below short term rates. This situation can occur when a slowing of the economy is expected or during a period of instability where investors look to the safety of the longer term bonds.