Video Series:


Unpack key topics that impact banking, investing, financial services and the wider economy in this award-winning explainer series. 

See all Unpacked videos

How healthy is the U.S. economy? Could a recession be coming? How do investors feel about the current economic situation?


While none of us can see into the future, yield curves can help us map what lies ahead, answering these questions and many more with surprisingly-high levels of accuracy. So what exactly is a yield curve and how can one little line tell us so much?


This is Yield Curves: Unpacked


In a nutshell, a yield curve is found on a graph that compares bond yields to maturity dates. Once plotted, the points are joined together with a line, forming the familiar yield curve. Here are four terms you'll need to understand to wrap your head around yield curves.


Bonds are debt securities issued by governments and corporations to raise money. In other words, bonds are a loan from an investor to an issuer. If an investor buys a Treasury bond, for example, they're essentially lending money to the U.S. government. Coupons are fixed interest payments, which investors receive periodically. This is the same as the interest paid on any loan, such as a mortgage or personal loan.


Maturity is when a bond's term comes to an end. This can be from 1 year to more than 10 years. At this point, the investor will get back the money they paid for the bond.


Yields are the returns made on a bond. The simplest version of yield is calculated by dividing the interest rate by the bond's current market price. Longer-term bonds will have higher yields-- in a stable economic environment, anyway. This is because they're considered riskier investments, as there's more time for market conditions and bond prices to change.


While a price change doesn't affect the fixed coupon payment, it does affect the yield. When prices go up, yields go down, making the bond less appealing. When long-term bonds have higher yields than short-term bonds, this forms the typical upward slope of a yield curve from left to right. A steeper slope can signal better economic conditions ahead, with higher growth and inflation, meaning better returns on long-term bonds.


Yield curves can also invert and slope in the opposite direction. This happens when short-term bonds have higher yields than long-term bonds. It's rare, but it can signal that an economic slowdown or even a recession is coming. This is particularly true of the U.S. Treasury yield curve, which tracks yields on short- and long-term treasuries. If you hear someone talking about the yield curve, they're likely referring to this one. And it's predicted past recessions with a great degree of accuracy.


How is this possible? First, the Treasury yield curve is a good reflection of investor sentiment. If investors expect interest rates to fall in the future, they might buy longer-term bonds to lock in the current rate, pushing up the price and lowering the yield. This is one way a yield curve can invert.


Low interest rates are usually associated with a weak economic environment, which is why this pattern can spell bad news for the economy-- if investors are correct, of course. Another reason is simply that the Treasury yield curve is so widely watched. Potential signs of a flattening curve may be enough to put markets in a spin.

There can be many reasons behind the pattern seen on a yield curve. And it's hard to account for all the forces at play within the bond market. But whatever the reasons might be, the Treasury yield curve will remain a strong signal of economic activity.


In a nutshell, yield curves compare bond yields against time to maturity. But time and again, they have provided insights into the health of the U.S. economy, predicting past recessions with a great degree of accuracy. How is this possible? Learn all about yield curves, what happens when they invert and how they reflect investor sentiment in this explainer.