A yield curve is a line that plots the yields (interest rates) of bonds with the same credit quality but different maturities. The best-known one is the US Treasury yield curve. It plots the yields on US government debt, from 1-month bills out to 30-year bonds.
Because every Treasury carries the same credit risk, the curve isolates one thing: how much extra yield investors want for lending money for longer. Its shape is closely watched as a hint about where interest rates and the economy may be heading.
Reading the curve
The horizontal axis shows maturity (1 month, 3 months, 1 year, 2 years, 10 years, 30 years and so on). The vertical axis shows yield. Connect the points, and you have the curve.
Analysts often boil the shape down to one number, the spread between two maturities. The most quoted is the 10-year yield minus the 2-year yield (the “2s10s” spread). A positive spread means the curve slopes up; a negative spread means it’s inverted.
The three main shapes
| Shape | What it looks like | What it often suggests |
|---|---|---|
| Normal (upward-sloping) | Long-term yields are higher than short-term yields | Investors expect steady growth and want extra yield for tying up money longer |
| Inverted (downward-sloping) | Short-term yields are higher than long-term yields | Investors expect rates to fall, often because they expect the economy to slow |
| Flat | Short- and long-term yields are about the same | A transition: the outlook is uncertain, or the curve is moving between normal and inverted |
Normal
This is the usual shape. Lending for 10 or 30 years ties up money longer and carries more risk from inflation and rate changes, so investors normally ask for a higher yield.
Inverted
When short-term rates rise above long-term rates, the curve inverts. This often happens when the Federal Reserve has raised short-term rates to fight inflation, while investors expect rates to come down later. An inverted curve has come before most US recessions of the past 50 years. The 2s10s spread, for example, inverted in 2022 and stayed negative into 2024. It’s a warning sign, not a timetable: the gap between inversion and any slowdown has varied widely, and the signal isn’t always right.
Flat
A flat curve means investors see little difference between short and long maturities. It often shows up as the curve moves from normal to inverted or back.
Note: A curve that steepens after being inverted (short rates falling faster than long rates) has also often come around the start of a slowdown. The shape matters, but so does the direction it’s moving in.
How investors use the yield curve
- Gauging the economy: if the curve suggests a slowdown, some investors lean toward defensive assets that have historically held up better in recessions.
- Choosing bond maturities: when the curve is steep, longer bonds pay noticeably more. When it’s flat or inverted, short-term Treasuries can pay as much as or more than long ones, with less interest-rate risk.
- Watching inflation expectations: a curve that steepens sharply can signal that investors expect higher inflation, which hurts long-term bonds the most.
Where to find today’s rates
The US Department of the Treasury publishes the official rates every business day: Daily Treasury Par Yield Curve Rates. To see the curve, plot one day’s row with maturity on the horizontal axis and yield on the vertical axis. A line chart in Excel works well.
For more on how bond prices and yields move, see Investment Theory.
This article is for education only and isn’t investment advice.