What Is the Yield Curve?

By Motley Fool Staff – Updated Nov 6, 2024 at 1:41 PM

Key Points

Yield curve shows bond yield versus maturity; short-term less yield but safer, long-term higher yield.
Inverted yield curve suggests economic downturn, impacting decisions on bond maturity selection.
Understanding yield curves helps balance investment risk and timeline, aiding portfolio adjustments.

The yield curve is a line on a graph that typically shows the relationship between the yield that investors receive on a bond investment and the time until the bond matures. The borrowing period, or the time to maturity, is usually represented on the x-axis; the annual yield to maturity appears on the y-axis.

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A digital stock market chart going up. — Image source: Getty Images

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US Treasuries standard yield curve example. — Source: www.ustreasuryyieldcurve.com.

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Inflation, however, was spiking. In an effort to contain it, the Federal Reserve Board increased the cost of borrowing money seven times in 2022 and added another rate hike in early 2023. Rising interest rates and inflation caused investors to worry more about a recession. A little more than six months later, the yield curve had inverted:

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Example of U.S. Treasuries inverted yield curve. — Source: www.ustreasuryyieldcurve.com.

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Generally, bond prices fall when interest rates rise. While the 20- and 30-year Treasuries were still offering yields or roughly between 3% and 3.5%, the yields of short-term notes soared past 4.5%, with six-month notes approaching 5%.

Does this mean smart investors should put their money into six-month Treasuries? Not necessarily. What happens if interest rates continue to rise? Bond yields could rise again, devaluing your purchase. Of course it all depends on your risk appetite and how you think the economy will fare in the months and years ahead. The yield curve isn’t infallible when it comes to predicting the course of the economy, but it does offer extremely useful comparisons for investors.

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