A yield curve is a graphical representation used to show the yield on bonds (of equal credit quality) over a range of maturity periods.
It plots bond yields (vertical axis) against maturities (horizontal axis).
Generally, longer maturities have higher yields than shorter maturities as investors want a higher return when they are taking longer term risks. This yield curve is usually upward sloping and gradually flattens out as maturities get longer.
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However, the yield curve may be inverted when longer maturities have a lower yield than shorter maturities.
This indicates that an anticipated decrease in long-term interest rates over time is expected. Historically, the inverted yield curve has proven to be a reliable indicator of a recession.
The most widely used bond yield curve is for U.S. Treasuries. Its slope and shape measure investors’ feelings about risk and the direction of the economy.
#finterms #yieldcurve #bonds #invertedyieldcurve #maturities #yields
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