Yield Curve Definition

Dictionary of Financial Terms

A yield curve is a chart of bond yields from the shortest-maturity issues to the longest-maturity ones.

The Treasury yield curve, for example, graphs the yields of the three-month bill, the six-month bill, the yearbill, the two-year note, the five-year note, the 10-year note and the 30-year bond at a point in time.

Normally, yield curves are positively sloped, meaning that the longer the maturity, the higher the yield. Investors normally demand higher yields from long-maturity bonds as compensation for interest-rate risk.

However yield curves can become negatively sloped, or inverted, with long-term yields lower than short-term ones, under certain circumstances. Normally, yield curves invert when investors believe that economic growth will slow. Slow growth could prompt the Fed to cut the fed funds rate, causing short-term bond yields to fall in sympathy. Investors become willing to buy long-term bonds at lower yields than short-term ones because they believe money invested in short-term issues will ultimately face the prospect of being reinvested at much lower yields.

The Treasury yield curve became partially inverted in early 2000 for reasons having as much to do with supply and demand as with economic expectations. The Treasury began conducting buybacks of long-maturity issues, causing their prices to rise (and yields to fall) relative to short-maturity ones as the supply began to dry up.

Definitions of Financial Terms