Three Shapes of the Yield Curve

  • Term Structure of Interest Rates: The term structure of interest rates is the relationship between the spot rate of U.S. Treasury securities and their time until maturing.
  • Yield Curve: The relationship between U.S. Treasury yields and time to maturity.

Three Shapes of the Yield Curve

  • Positive Slope: Short term bonds have lower yields than long term bonds. Because a longer borrowing time frame entails greater uncertainly, a positively sloped yield curve is considered "normal."

  • Flat: Yields across the spectrum, primarily from two year to thirty year are all about the same.

  • Inverted (negative slope): Longer term bonds have lower yields than short term bonds. This scenario is associated with anticipation of dropping interest rates in expectation of a recession.

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