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A yield curve plots the interest rates on bonds of the same credit quality across different maturities. In normal conditions longer maturities pay more, compensating investors for tying up money and bearing inflation risk.
How it works
When short-term yields rise above long-term ones, the curve is said to invert. Markets read this as a signal that investors expect policy rates to fall in future, often because growth is expected to slow.
The relationship between short- and long-dated bond yields is one of the most watched signals in finance. Its message is useful but frequently over-interpreted.
What to watch
The curve is shaped by many forces besides growth expectations — including central-bank bond purchases, regulatory demand for safe assets and global capital flows — so it is best read alongside other indicators.
Key concepts
- Bonds
- Yield curve
- Markets
