Yield Curve

The graphical representation of the yields of a set of bonds or other financial instruments with the same credit risk and currency, but with different maturities. Yield is plotted along the vertical axis and time to maturity on the horizontal axis. There are many different yield curves, including government benchmark curves, deposit curves, swap curves, and credit curves. Benchmark curves consist of securities that meet certain criteria for liquidity, size, price, availability, turnover rate and other characteristics. These securities set standards for the market against which other issues can be measured. A yield curve is not static and can change quickly at any time. For example, a word or two from a central bank official can fuel expectations of higher inflation, which may cause longer-term debt prices to fall more than short-term prices. The normal yield curve is positive, rising from left to right, because yields on longer maturities are higher than on short maturities to reflect the greater risk of lending money for a longer time. If the yield curve is positive sloping it will steepen as the longer yields move up more than the shorter ones. An inverted, or negative, yield curve slopes downwards from left to right, with short-term yields higher than long-term yields. Investors may be expecting a reduction in inflation in the longer term or there may be expectations of sharply reduced supply of bonds, both of which will depress yields.