Yield Curve

A graph showing interest rates of bonds with the same credit quality plotted across different maturities, from short-term bills to long-term bonds.

The yield curve typically plots US Treasury yields from 3-month bills out to 30-year bonds. Under normal conditions it slopes upward: investors demand higher yields for lending money over longer periods because of uncertainty and inflation risk. A "steep" curve signals expectations of strong growth ahead; a "flat" curve means rates are similar across maturities.

The shape of the yield curve encodes the bond market's collective expectations about growth, inflation, and Fed policy. When the Fed raises short-term rates aggressively it can push short yields above long yields, creating an "inversion." An inverted yield curve has preceded every US recession in the past 50 years, making it one of the most reliable leading indicators available.

Beyond recession prediction, the curve matters for bank profitability — banks borrow short (taking deposits) and lend long (issuing mortgages), so a steep curve benefits bank earnings while an inversion squeezes net interest margins. Changes in curve shape also drive significant rotations in the bond market and affect the relative valuation of growth versus value stocks.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.