Editing Yield curve (section)

{{Short description|Relationships among bond yields of different maturities}}
{{About|relationships among bond yields of different maturities}}
{{More citations needed|date=June 2011}}

[[File:Yield curve 20180513.png|right|thumb|250px|The US Treasury yield curve as of May 13, 2018. The curve has a typical upward sloping shape.]]


[[File:2 & 10 year T vs FFR.webp|thumb|300px|
{{legend-line|#4572A7 solid 3px|10 year [[United States Treasury security|Treasury Bond]]}}
{{legend-line|#7ED321 solid 3px|2 year Treasury Bond}}
{{legend-line|#D0021B solid 3px|[[Federal Funds Rate]]}}
]]
[[File:Inverted Yield Curve 2022.webp|thumb|300px|[[Inverted yield curve|Inverted Yield Curve]] 2022 <br> 10 year minus 2 year treasury yield ]]

In [[finance]], the '''yield curve''' is a graph which depicts how the [[Yield to maturity|yields]] on debt instruments – such as bonds – vary as a function of their years remaining to [[Maturity (finance)|maturity]].<ref>{{cite book |last1=Fabozzi |first1=Frank J. |title=Bond Markets, Analysis and Strategy |date=1996 |publisher=Prentice-Hall, Inc. |location=Upper Saddle River, NJ |isbn=0-13-339151-5 |page=85 |edition=Third}}</ref><ref>[https://finance.yahoo.com/news/yield-curve-101-ultimate-guide-110026560.html Yield Curve 101: The Ultimate Guide for ETF Investors – Yahoo Finance] [[Yahoo Finance]]</ref> Typically, the graph's horizontal or x-axis is a time line of months or years remaining to maturity, with the shortest maturity on the left and progressively longer time periods on the right. The vertical or y-axis depicts the annualized yield to maturity.<ref>{{cite book |title=Fabozzi op cit p. 86}}</ref> 

Those who issue and trade in forms of debt, such as loans and bonds, use yield curves to determine their value.<ref>{{cite book |title=Fabozzi op cit p. 87}}</ref> Shifts in the shape and slope of the yield curve are thought to be related to investor expectations for the economy and interest rates. 

Ronald Melicher and Merle Welshans have identified several characteristics of a properly constructed yield curve. It should be based on a set of securities which have differing lengths of time to maturity, and all yields should be calculated as of the same point in time. All securities measured in the yield curve should have similar credit ratings, to screen out the effect of yield differentials caused by credit risk.<ref>{{cite book |last1=Melicher, Ronald and Welshans, Merle |title=Finance: Introduction to Markets, Institutions and Management |date=1988 |publisher=South-Western Publishing |location=Cincinnati |isbn=0-538-06160-X |pages=490–491 |edition=7th}}</ref> For this reason, many traders closely watch the yield curve for [[United States Treasury security|U.S. Treasury debt securities]], which are considered to be risk-free. Informally called "the Treasury yield curve", it is commonly plotted on a graph such as the one on the right.<ref>{{cite news |last1=Phillips |first1=Matt |title=What's the Yield Curve? 'A Powerful Signal of Recessions' Has Wall Street's Attention |url=https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html |work=The New York Times |date=25 June 2018}}</ref>  More formal mathematical descriptions of this relationship are often called the '''term structure of interest rates'''.