CONCEPTS · Rates

Yield Curve

One issuer, many maturities. The line you draw through those yields carries information about the future, but only once you know what each part of it is pricing.

One issuer across many maturities

A yield curve plots the yields on the debt of a single issuer across a range of maturities, from overnight out to 30 years. Because the issuer is the same, the differences between points cannot be about credit risk; they are about time. The curve is the price of borrowing for different lengths.

The shape as information

The short end is anchored by the policy rate and the market's expectation of where that rate is heading. The long end is dominated by the term premium, the extra compensation for locking money up for years. A normal, upward-sloping curve is the sum of a modest expected path and a positive premium.

A flat curve says the market expects little difference between short and long rates. An inverted curve, where short yields exceed long, says the market expects the policy rate to fall in future, usually because it expects tightening to have slowed the economy. Steepness simply says the gap between the two ends is wide.

What the shape does not tell you

The shape is an expectation, not a forecast with a date. An inverted curve has preceded recessions, but it does not say when one arrives, and it can stay inverted for a long time. It records what the market thinks about policy, not what will happen.

One checkable use: whenever the curve is quoted, ask which end moved. A change driven by the short end is a policy story, and a change driven by the long end is a growth or inflation-risk story. The same shape can be produced by opposite news, and only the decomposition tells you which you are reading.

IF YOU REMEMBER ONE THING

DefinitionThe yields on one issuer's debt plotted across maturities, the price of borrowing for different lengths of time.

What it showsThe expected path of the policy rate at the short end, plus a term premium at the long end.

What it does notPredict with a date. The shape records what the market expects, not when or whether it happens.

Next: Term Premium