A yield curve is a graphical representation of the relationship between the yield on bonds of different maturities and their corresponding time to maturity. It shows the yields on bonds of different maturities, from short-term to long-term.
In a normal market condition, a yield curve slopes upward, indicating that long-term bonds have higher yields than short-term bonds. This is known as a “normal” or “upward-sloping” yield curve. However, there are other types of yield curves, including “flat,” “inverted,” and “humped” yield curves.
A flat yield curve occurs when the yields on short-term and long-term bonds are roughly the same. An inverted yield curve occurs when the yields on long-term bonds are lower than those on short-term bonds. A humped yield curve occurs when yields on intermediate-term bonds are higher than those on short-term and long-term bonds.
Yield curves are important indicators of the economy and are closely watched by investors, analysts, and policymakers. The shape of the yield curve can provide information on economic growth, inflation, monetary policy, and market expectations.