What is the Yield Curve?

The yield curve plots the interest rates (yields) of bonds with equal credit quality but different maturity dates. Its shape is one of the most powerful indicators of economic health, future interest rate expectations, and market sentiment.

How to Interpret the Charts

• Yield Curve Shape: A "normal" curve is upward sloping, as longer-term bonds typically carry higher yields to compensate for longer-term risk. A "flat" or "inverted" (downward-sloping) curve, where short-term yields are higher than long-term yields, is a historically reliable predictor of a future recession.
• Spreads (10Y-2Y, 10Y-3M): These charts isolate the difference between key long-term and short-term yields. When the spread goes below zero, the curve is inverted, signaling elevated economic risk.
• High-Yield Credit Spread: This shows the extra yield investors demand to hold risky corporate bonds (junk bonds) instead of safe government bonds. A widening spread indicates rising fear and credit risk in the market, often preceding economic downturns.

Practical Applications

• Assess the market's long-term economic outlook to inform portfolio allocation.
• Anticipate potential shifts in Federal Reserve policy, as the Fed often cuts rates in response to an inverted curve.
• Gauge overall "risk-on" or "risk-off" sentiment in the credit markets.