Yield curve

A yield curve has two meanings: financial and physical.

Yield curves in finance

In finance, it is a graph of the effective or real interest (the yield) of a security, usually a bond, against the length of time until all capital and interest has been paid back (the maturity). Yield curves are also called term structure of interest rates.

Yield curves offer meaningful insight if maturity is the only variable differing among the securities examined. Other properties, such as a bond's credit rating or its call features, must be identical.

Fixed income analysts, those who analyse bonds and related securities, use the yield curve to understand market conditions. Economists use it to understand economic conditions.

Yield curves are usually upward sloping and accelerating; the longer the maturity, the higher the yield. The usual explanation is that longer maturities entail greater risks for the investor, and so require higher yields. With longer maturities, more catastrophic events might occur that may impact the investment, hence the need for a risk premium. This explanation depends on the distant future being more uncertain than the near future, and risk of future adverse events (such as default and higher short-term interest rates) being higher than the chance of future positive events (such as lower short-term interest rates).

The reverse, when short term rates are higher than long term rates, results in an inverted yield curve. Inverted yield curves have historically preceded economic depressions.

Yield curves carry an implicit forecast of future short-term interest rates: for example if the annual yield on a 10-year bond is 5%, and on an 11-year bond is 5.5%, then the implicit yield in year 11 is

1.055¹¹/1.05¹⁰ - 1 = 10.6%

Yield curves in physics

In materials, the yield curve describes the behaviour of a plastic material, e.g. .