A yield curve is a line that plots the yields or interest rates of bonds that have equal credit quality but different maturity dates. The slope of the yield curve predicts the direction of interest rates and the economic expansion or contraction that could result. In other words, yield curves represent the relation between bond yield and maturity. Yield curves have three main shapes: (a) normal upward-sloping, (b) inverted downward-sloping, and flat.
How Can Investors Use the Yield Curve?
Investors can use the yield curve to predict the economy that will affect their investment decisions. An investor might move their money into defensive assets that traditionally do well during a recession if the bond yield curve indicates an economic slowdown. They might avoid long-term bonds with a yield that will erode against increased prices if the yield curve becomes steep, suggesting future inflation.
