LeoGlossary: Yield Curve

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A graphical representation of the interest rates paid on debt instruments (bonds) across a range of maturity dates.

The yield is shown on the vertical axis (x) while the maturity dates are on the y-axis. The bonds used all have the same credit quality.

There are three shapes it can take:

normal (upward sloping) inverted (downward sloping) flat

Many look to the yield curve as an economic indicator and as a sign of what will happen with inflation. A lot of the focus tends to be in the relationship between the short end (left side) and the long end (right side) of the curve. The short end has closer maturity dates and, thus, are impacted my by the actions of the Fed.

As the curve flattens out and starts to invert, many feel this is a sign of recesssion.

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