WHAT IS A BOND YIELD CURVE?
A bond yield curve effectively plots the interest rates paid to investors by bond issuers for different maturities. This applies to a range of bonds that have equal credit value but varying maturity dates.
We often come across ‘normal’ and ‘inverted’ yield curves.
A normal yield curve indicates the advantage of investing in a bond with a relatively longer maturity date. This form of curve is upward sloping. The majority of yield curves are upward sloping because investors demand a yield premium to lend money for longer periods of time, given the greater risk associated with this. Upward sloping yield curves also reflect investor expectations of steady economic growth.
An inverted yield curve is downward sloping, when short-term interest rates are higher than long-term interest rates. This is unusual but reflects an expectation that interests rates will be lower in the future, most likely as a result of a recession.