Yield curve

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The yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. It enables investors to compare at a glance the yields offered by short-term, medium-term and long-term bonds.

The curve can take three primary shapes. If short-term yields are lower than long-term yields (the line is sloping upwards), then the curve is referred to a positive (or "normal") yield curve.

If short-term yields are higher than long-term yields (the line is sloping downwards), then the curve is referred to as an inverted (or "negative") yield curve.

A flat yield curve exists when there is little or no difference between short- and long-term yields. Only bonds of similar risk are plotted on the same yield curve.^[1]

The most frequently reported yield curve is the one comparing the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for determining the yield on other types of debt such as mortgage rates or bank lending rates, as well as to predict changes in economic output and growth.

Treasury Yield Curve Rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve relates the yield on a security to its time to maturity, based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. ^[2]

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