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Yield curve

The Yield curve is a graph showing the connection between interest rates (yields) and the maturity dates of bonds of similar quality, usually U.S. government Treasury bonds, at a certain point in time.

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Expanded Definition

The yield of bonds increases with the time to maturity, as uncertainty is higher for lenders waiting longer to get their money back, so they want a higher yield along the way. The "normal" yield curve expresses this relationship for current market conditions succinctly.

The yield curve is the standard reference point for other debt instruments. Most are priced on the current market differential from the yield curve for a given maturity and bond rating. Market differentials are published by Moody's and other services.

The shape of the yield curve has an impact on many fixed-yield instruments. Numerous businesses make money by borrowing at short bond rates and investing at long bond rates. An inverted yield curve, where long bonds (those with maturities further in the future) pay lower interest than short bonds (those with maturity dates closer in time), is taken as a classic indicator of a pending recession. A flat yield curve affects businesses whose profits depend on the differential.

The Federal Reserve Board attempts to fight inflation by raising interest rates. Its action pushes up short-term rates. As long-term rates are mostly influenced by market forces, the immediate effect is to flatten the yield curve.

The yield curve may be viewed at any time by punching the words yield curve into Google or another Internet search engine. See for example: [1]

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