Yield Curve

The yield curve is a graph that plots the yields of U.S. Treasury securities against their maturities, from the shortest (1-month bills) to the longest (30-year bonds). It represents the term structure of interest rates at a single point in time.

A normal yield curve slopes upward: longer maturities pay higher yields to compensate investors for the additional risk of holding debt over a longer horizon. This extra compensation reflects both interest rate risk (duration) and uncertainty about future economic conditions.

The shape of the curve encodes the market's collective expectations for growth, inflation, and monetary policy. Three principal components describe its behavior:

• Level shifts the entire curve up or down (driven by broad rate changes)
• Slope tilts the curve steeper or flatter (driven by the spread between long and short rates)
• Curvature bends the belly relative to the wings (driven by intermediate maturities)

The U.S. Treasury yield curve is the global benchmark for risk-free rates. It serves as the foundation for pricing corporate bonds, mortgages, interest rate swaps, and virtually all fixed-income instruments.

Traders and economists monitor the curve continuously because changes in its shape often precede shifts in the economic cycle. A flattening or inverting curve has historically signaled slowing growth or recession, while a steepening curve often signals recovery or expectations of easier monetary policy.

What Sets the Shape

Three forces set the shape of the curve at any moment. They can pull in opposite directions.

The expected path of short rates. A long yield is in part an average of the short rates the market expects over the life of the bond. When the market expects the Federal Reserve to cut, long yields can sit below short yields even though nothing has changed at the front of the curve yet.

The term premium. Investors want extra yield to hold one long bond instead of rolling a series of short bills. That extra yield pays them for interest rate risk and for uncertainty about inflation. Nobody can observe the term premium directly, so a model must estimate it.

Convexity demand. A long bond gains more from a yield fall than it loses from an equal yield rise. This asymmetry has value. Investors pay for it by accepting a lower yield, which pulls the far end of the curve down. The effect is small at short tenors and grows with maturity.

The distinction matters when you read a curve move. A curve can steepen because the market has started to price rate cuts. It can also steepen because the term premium has risen while the expected policy path has not moved. The two causes point to different economic conditions.

The Front End, the Belly, and the Long End

Traders divide the curve into three zones. Each zone responds to different information.

• The front end covers 1 Mo to 2 Yr. Current and expected policy anchor it. It moves when the Federal Reserve moves, or when the market changes its view of what the Federal Reserve will do next.
• The belly covers 3 Yr to 7 Yr. It is the most sensitive part of the curve to the medium term policy path. It also carries most of the curve's curvature, which is why butterfly trades are usually built around it.
• The long end covers 10 Yr to 30 Yr. Inflation expectations, term premium, and structural demand from pension funds and insurers drive it. Near term policy matters less here.

A move in one zone does not require a move in another. Long yields can rise while the front end stays fixed. This is the reason traders watch spreads between zones rather than any single yield.

Three Views of the Same Curve

The Treasury publishes a par curve. A par yield is the coupon rate that would price a bond at 100 for that tenor. Every par yield therefore blends information from many payment dates, because each coupon in that bond is discounted over a different span of time.

Two other curves describe the same prices in cleaner terms. The spot rate curve gives the yield on a single cash flow at each date, with no blending. The forward rate curve gives the rates for future periods that the spot curve implies under a no-arbitrage condition.

All three curves come from the same set of market prices. Which one to use depends on the question. Use par yields to quote and compare bonds. Use spot rates to discount a cash flow. Use forward rates to find the hurdle a curve trade must beat.

FAQ

What is a normal yield curve shape?

A normal curve slopes upward from short to long maturities, reflecting compensation for the extra interest rate and inflation risk that bondholders bear over longer horizons. Historically the U.S. Treasury curve has been upward-sloping the majority of the time, with the 2s10s spread typically between 0 and +250 basis points outside of recessionary or near-recessionary periods.

What does it mean when the yield curve inverts?

An inverted curve has long-maturity yields below short-maturity yields. It signals that the market expects the Federal Reserve to cut short-term rates in the future, usually because growth is slowing. Inversion of the 2s10s spread and the 3m10y spread has preceded every U.S. recession since the late 1970s, though the lag from inversion to recession has varied widely.

Where can I see the current yield curve on this site?

The /curves page plots the most recent Treasury par yield curve across the standard set of tenors from 1 month to 30 years and lets you overlay a comparison curve from any historical date. The /forwards page derives the implied forward curve at user-selected horizons from the spot curve.