what is a yield curve 
a yield curve is a line that plots the yields or interest rates of bonds that have equal credit quality but different maturity dates the slope of the yield curve predicts the direction of interest rates and the economic expansion or contraction that could result yield curves have three main shapes normal upward sloping inverted downward sloping and flat yield curve rates are published on the u s department of the treasury s website each trading day using a yield curvea yield curve is a benchmark for other debts in the market such as mortgage rates and bank lending rates the yield curve can predict changes in economic output and growth over time the most frequently reported yield curve compares the three month two year five year 10 year and 30 year u s treasury debt yield curve rates are available on the treasury s interest rate websites by 6 00 p m et each trading day 12some investors use the yield curve to make investment decisions based on the likely direction of bond rates a visual representation of the curve is easy to build using an excel spreadsheet types of yield curvesthe three types of yield curves include normal inverted and flat a normal yield curve shows low yields for shorter maturity bonds increasing for bonds with a longer maturity the curve slopes upward this indicates that yields on longer term bonds continue to rise responding to periods of economic expansion a normal yield curve implies stable economic conditions and a normal economic cycle a steep yield curve implies strong economic growth with conditions often accompanied by higher inflation and higher interest rates sample yields on the curve can include a two year bond that offers a yield of 1 a five year bond that offers a yield of 1 8 a 10 year bond that offers a yield of 2 5 a 15 year bond offers a yield of 3 0 and a 20 year bond that offers a yield of 3 5 some bond investors will use a roll down return strategy and sell a bond as it moves toward its maturity date this strategy is also known as riding the curve it works in a stable rate environment as the bond s yield falls and the price rises investors hope to capture profit from the rise in bond prices an inverted yield curve slopes downward with short term interest rates exceeding long term rates this type of curve corresponds to a period of economic recession when investors expect yields on longer maturity bonds to trend lower in the future 3investors seeking safe investments in an economic downturn tend to choose longer dated bonds over short dated bonds bidding up the price of longer bonds and driving down their yield image by julie bang investopedia 2019an inverted yield curve is rare it s historically been a warning of recession 3a flat yield curve shows similar yields across all maturities implying an uncertain economic situation a few intermediate maturities may have slightly higher yields that cause a slight hump to appear along the flat curve these humps are usually for mid term maturities of six months to two years the curve shows little difference in yield to maturity among shorter and longer term bonds a two year bond may offer a yield of 6 a five year bond of 6 1 a 10 year bond of 6 and a 20 year bond of 6 05 in times of high uncertainty investors demand similar yields across all maturities 