Yield curve

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The yield curve, also known as the term structure of interest rates, is a graph that plots the difference between long and short term interest rates. It enables investors to compare at a glance the yields offered by short-term, medium-term and long-term bonds. In the U.S., the Treasury yield curve is the first mover of all domestic interest rates and an influential factor in setting global rates.

Interest rates on the other domestic bond categories rise and fall with Treasuries, which are the debt securities issued by the U.S. government. To attract investors, a bond that contains greater risk than that of a similar Treasury bond must offer a higher yield. For example, the 30-year mortgage rate historically runs 1 - 2 percent above the yield on 30-year Treasury bonds.

The curve can take three primary shapes. If short-term yields are lower than long-term yields (the line is sloping upwards), then the curve is referred to a positive (or "normal") yield curve.

If short-term yields are higher than long-term yields (the line is sloping downwards), then the curve is referred to as an inverted (or "negative") yield curve.

A flat yield curve exists when there is little or no difference between short-term and long-term yields. Only bonds of similar risk are plotted on the same yield curve.[1]

The most frequently reported yield curve is the one comparing the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for determining the yield on other types of debt such as mortgage rates or bank lending rates, as well as to predict changes in economic output and growth.

Treasury yield curve rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve relates the yield on a security to its time to maturity, based on the closing market bid yields on actively traded Treasury securities in the over-the-counter (OTC) market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York.[2]

On Aug. 10, 2011, the yield curve narrowed to the lowest since Oct. 11, 2010.[3]