JFL

Dec. 12, 2018

What Is the Yield Curve and Why Does It Matter?

The yield curve is a term used to describe the different interest rates available for investors at different bond market maturity points. Most of the time the yield curve is positively sloping, meaning interest rates increase as investors move out the curve, i.e. investors receive a higher yield the longer the term of their investment. However, it can also invert, meaning short-term interest rates are higher than long-term rates. This occurs when investors in the long end of the curve, which is more sensitive to inflation expectations than economic growth, believe that the central bank’s interest rate hikes have any future inflation risks under control. These yield curve inversion environments are relatively rare and, in and of themselves, signal that investors believe the risk of recession in one to two years is higher than usual.

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