Yield Curve

The yield curve is a graphical representation of the interest rates on bonds of the same credit quality but different maturity dates, typically plotted from short-term to long-term. A normal yield curve slopes upward, with longer maturities offering higher yields. An inverted yield curve, where short-term yields are higher than long-term yields, is widely watched as a potential indicator of a coming economic recession.

When the yield curve inverts — meaning the yield on 2-year Treasuries exceeds that on 10-year Treasuries — it has historically preceded economic recessions in the United States. Traders monitor yield curve shifts closely because they influence borrowing costs, bank profitability, and investor sentiment across asset classes. A steepening yield curve may benefit financial sector stocks, while a flattening or inverted curve can trigger risk-off behaviour, leading traders to reduce exposure to cyclical assets and seek defensive positions.