The yield curve is a graphical representation of the relationship between the interest rates of bonds with different maturities. It plots the yields of government bonds of various maturities on the Y-axis against the time to maturity on the X-axis. Typically, the yield curve is upward sloping, which means that bonds with longer maturities offer higher yields than those with shorter maturities.
The shape of the yield curve can provide important information about the market’s expectations for future economic conditions. For example, a steep upward sloping yield curve may indicate that investors expect higher inflation and stronger economic growth in the future. In contrast, a flat or inverted yield curve, where short-term rates are higher than long-term rates, may indicate that investors expect weak economic growth and low inflation in the future.
Central banks also monitor the yield curve closely as it can provide insights into the future direction of interest rates. For example, an inverted yield curve is often seen as a warning sign of a possible recession, as it may indicate that investors expect the central bank to lower interest rates in the future in response to weaker economic conditions.
Link to the St. Louis Fed
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