What is a Yield Curve?

Yield Curve is a chart showing the yield of a group of bonds or other financial instruments that have the same currency and credit risk but different maturities. The vertical axis represents the rate of return, and the horizontal axis is the time to maturity.

Yield curve

Steep yield curve

It usually appears at the beginning of economic expansion immediately after the economic recession. At this time, economic stagnation has suppressed short-term interest rates, but once growing economic activity re-establishes demand for capital (and fear of inflation), interest rates generally begin to rise.

Inverted curve

Traditionally, the economy is about to slow down. Financial institutions (such as banks) often borrow at short-term interest rates and lend out funds for long periods. Generally speaking, when the long-term interest rate is higher than the short-term interest rate and the two are relatively high, in this case, bank borrowing is usually lower. Generally, lower corporate borrowings lead to credit crunches, slower operations and weakened economies.

This is a typical view. The latest situation is different, perhaps more complicated than before. The U.S. Treasury has reduced the issuance of long-term bonds, and in the past few yearswhen Washington had its first fiscal surplus in many yearsbegan to repay some outstanding long-term bonds.

Reducing the issuance of long-term bonds has prompted investors to buy longer-term bonds, which in turn drives up the price of long-term bonds and lowers their yields, thus creating an inverted curve. (Bond prices and yields are going in the opposite direction.) However, the Federal Reserve implemented aggressive interest rate cuts in 2001, and with short-term interest rates depressed, the yield curve returned to a traditional upward shape.