Key Terms
Yield curve
The line traced by a government's borrowing rates across maturities from shortest to longest, whose shape is closely watched and whose meaning is contested.
By the Investfora Research Desk
The yield curve is the line traced by a government's borrowing rates across maturities, from the shortest bills to the longest bonds, at a single moment. Plot the yield for each maturity and join the points; the result is the curve. It commonly slopes upward, with longer lending commanding higher rates, but it can flatten, or invert so that short rates exceed long ones. The shape is widely watched, and what any particular shape signifies remains contested.
A worked example
Suppose a hypothetical government borrows at 3 per cent for one year, 3.5 per cent for five years and 4 per cent for ten years. Plotted, those points slope upward, and the gap between the ten-year and one-year rates is one percentage point. If the one-year rate later rose to 4.5 per cent while the ten-year rate stayed at 4 per cent, the curve would invert: the same gap would become minus 0.5 percentage points.
The curve is a record of prices at one instant, not an explanation of them. It does not say why the shape formed, and the shape settles nothing about what rates or the economy will do next.