Glossary
Yield Curve
A line of rates by maturity that hints at the economy
The yield curve plots interest rates on bonds of different maturities — maturity along the horizontal axis, rate on the vertical. Laying out three-month through thirty-year debt reveals how the market sees the future.
Normally it slopes upward. Lending for longer carries more risk, so it earns more interest. That shape is called a normal curve.
The signal comes when it inverts. Short-term rates rising above long-term ones means the market expects the economy to weaken and rates to fall.
Historically inversions have preceded several recessions. But the gap between inversion and downturn is usually more than a year, and there have been exceptions, so it is no precision instrument.
For individuals, the curve's shape informs borrowing and saving decisions. Depressed long rates can favour a fixed-rate loan, while high short rates can make a short deposit the better choice.