Yield Curve

#glossary #economics

The curve seen when plotting a Bond's annual percentage yield (y axis) against its maturity date (x axis). https://www.investopedia.com/terms/y/yieldcurve.asp

Normal Curve

Longer term debt has higher yields, a reward for giving the government more time to pay back the bond.

Investors favor shorter term debt, which drives up the price and lowers the yield.

Think $2^x$ on a chart.

Inverted Curve

Shorter term debt has higher yields. Often a sign of an economic downturn, investors seek longer term debt because they consider it safe. This drives up the price of longer term debt and lowers its yield.

Think $1/x, x > 0$ on a chart.

Flat curve

All bonds with the same credit rating have roughly the same yield, regardless of maturity date.

Think $y = n, n \in \mathbb{R}$ on a chart.