Yield Curves Definition
In the field of finance, yield curves represent the relationship between the yields on bonds of similar credit quality that have differing maturity dates. Many commonly use the yield curve plotting U.S. Treasury bonds of differing maturities (3-month, 2-year, 5-year, and 30-year) as a reference for interest rates on other financial instruments. Also, consider the U.S. Treasury bond yield curve an indicator of macroeconomic conditions.
Types of Yield Curves
A yield curve can be normal, flat, or inverted. In a normal yield curve, investments with longer maturities have higher yields than investments with shorter maturities. Whereas, in a flat yield curve, investments with long maturities and investments with short maturities have similar yields. In an inverted yield curve, investments with shorter maturities have higher yields than investments with longer maturities.
Consider a normal yield curve a sign of a healthy economy. However, if long-term yields are significantly higher than short-term yields, it may be a sign of inflation. A flat yield curve is considered a sign of a transitional period in an economy. An inverted yield curve is considered a sign of a troubled economy, or even a recession.