Editing Yield curve (section)

==Significance of slope and shape==
[[File:GBP yield curve 09 02 2005.JPG|right|thumb|250px|The British pound yield curve on February 9, 2005. This curve is unusual (inverted) in that long-term rates are lower than short-term ones.]]

Yield curves are usually upward sloping [[asymptotically]]: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out). The slope of the yield curve can be measured by the difference, or ''term spread'', between the yields on two-year and ten-year [[U.S. Treasury security|U.S. Treasury Notes]].<ref>{{cite web |url=https://www.newyorkfed.org/research/capital_markets/ycfaq#/ |title=The Yield Curve as a Leading Indicator |publisher=Federal Reserve Bank of New York |quote=This model uses the slope of the yield curve, or “term spread,” to calculate the probability of a recession in the United States twelve months ahead. Here, the term spread is defined as the difference between 10-year and 3-month Treasury rates.}}</ref> A wider spread indicates a steeper slope.<ref>{{cite news |last1=Buttonwood |title=A new phase in the financial cycle: the Treasury-bond yield curve flattens |url=https://www.economist.com/finance-and-economics/2021/06/24/a-new-phase-in-the-financial-cycle |access-date=25 August 2021 |newspaper=The Economist |date=June 26, 2021}}</ref>   

There are two common explanations for upward sloping yield curves. First, it may be that the market is anticipating a rise in the [[risk-free rate]]. If investors hold off investing now, they may receive a better rate in the future. Therefore, under the [[arbitrage pricing theory]], investors who are willing to lock their money in now need to be compensated for the anticipated rise in rates—thus the higher interest rate on long-term investments. Another explanation is that longer maturities entail greater risks for the investor (i.e. the lender). A [[risk premium]] is needed by the market, since at longer durations there is more uncertainty and a greater chance of events that impact the investment. This explanation depends on the notion that the economy faces more uncertainties in the distant future than in the near term. This effect is referred to as the [[liquidity spread]]. If the market expects more [[volatility (finance)|volatility]] in the future, even if interest rates are anticipated to decline, the increase in the risk premium can influence the spread and cause an increasing yield.

The opposite situation can also occur, in which the yield curve is "inverted", with short-term interest rates higher than long-term. For instance, in November 2004, the yield curve for [[Gilt-edged securities|UK Government bonds]] was partially inverted. The yield for the 10-year bond stood at 4.68%, but was only 4.45% for the 30-year bond. The market's anticipation of falling interest rates causes such incidents. Negative [[liquidity premium]]s can also exist if long-term investors dominate the market, but the prevailing view is that a positive liquidity premium dominates, so only the anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have historically preceded economic recessions.

The shape of the yield curve is influenced by [[supply and demand]]: for instance, if there is a large demand for long bonds, for instance from [[pension fund]]s to match their fixed liabilities to pensioners, and not enough bonds in existence to meet this demand, then the yields on long bonds can be expected to be low, irrespective of market participants' views about future events.

The yield curve may also be flat or hump-shaped, due to anticipated interest rates being steady, or short-term volatility outweighing long-term volatility.

Yield curves continually move all the time that the markets are open, reflecting the market's reaction to news. A further "[[stylized fact]]" is that yield curves tend to move in parallel; i.e.: the yield curve shifts up and down as interest rate levels rise and fall, which is then referred to as a "parallel shift".

===Types of yield curve===
There is no single yield curve describing the cost of money for everybody. The most important factor in determining a yield curve is the currency in which the securities are denominated. The economic position of the countries and companies using each currency is a primary factor in determining the yield curve. Different institutions borrow money at different rates, depending on their [[creditworthiness]].

The yield curves corresponding to the bonds issued by governments in their own currency are called the government bond yield curve (government curve). Banks with high [[Bond credit rating|credit ratings]] (Aa/AA or above) borrow money from each other at the [[LIBOR]] rates. These yield curves are typically a little higher than government curves. They are the most important and widely used in the financial markets, and are known variously as the [[LIBOR]] curve or the [[swap (finance)|swap]] curve. The construction of the swap curve is described below.

Besides the government curve and the LIBOR curve, there are [[corporation|corporate]] (company) curves. These are constructed from the yields of bonds issued by corporations. Since corporations have less [[creditworthiness]] than most governments and most large banks, these yields are typically higher. Corporate yield curves are often quoted in terms of a "credit spread" over the relevant swap curve. For instance the five-year yield curve point for [[Vodafone]] might be quoted as LIBOR +0.25%, where 0.25% (often written as 25 [[basis point]]s or 25{{Not a typo|bps}}) is the credit spread.

====Normal yield curve====
[[File:U.S. Treasury Yield Curves - v1.png|thumb|400px|right|U.S. Treasury yield curves for different dates. The July 2000 yield curve (red line, top) is inverted.]]
From the post-[[Great Depression]] era to the present, the yield curve has usually been "normal" meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall. This expectation of higher inflation leads to expectations that the [[central bank]] will tighten monetary policy by raising short-term interest rates in the future to slow economic growth and dampen inflationary pressure. It also creates a need for a risk premium associated with the uncertainty about the future rate of inflation and the risk this poses to the future value of cash flows. Investors price these risks into the yield curve by demanding higher yields for maturities further into the future. In a positively sloped yield curve, lenders profit from the passage of time since yields decrease as bonds get closer to maturity (as yield decreases, price ''increases''); this is known as '''rolldown''' and is a significant component of profit in fixed-income investing (i.e., buying and selling, not necessarily holding to maturity), particularly if the investing is [[Leverage (finance)|leveraged]].<ref>[http://www.ft.com/intl/cms/s/0/04868cd6-d7b2-11e0-a06b-00144feabdc0.html 'Helicopter Ben' risks destroying credit creation], September 6, 2011, [[Financial Times]], by [[Bill H. Gross|Bill Gross]]</ref>

However, a positively sloped yield curve has not always been the norm. Through much of the 19th century and early 20th century the US economy experienced trend growth with persistent [[deflation]], not inflation. During this period the yield curve was typically inverted, reflecting the fact that deflation made current cash flows less valuable than future cash flows (i.e. the purchasing power of $1 would increase over time). During this period of persistent deflation, a 'normal' yield curve was negatively sloped.

====Steep yield curve====
Historically, the 20-year [[Treasury bond]] yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises much higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity.

In January 2010, the gap between yields on two-year Treasury notes and 10-year notes widened to 2.92 percentage points, its highest ever.

====Flat or humped yield curve====
<!-- Deleted image removed: [[File:flat-yield-curve.gif|thumb|100px|Flat Yield Curve]] -->
A flat yield curve is observed when all maturities have similar yields, whereas a humped curve results when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal can revert to a normal curve or could later result into an inverted curve. It cannot be explained by the Segmented Market theory discussed below.

====Inverted yield curve====
{{main|Inverted yield curve}}

[[File:Inverted yield 30 year - 3 month.webp|thumb|400px|right|{{legend-line|blue solid 3px|30 year treasury minus 3 month treasury bond}} ]]
[[File:FFR treasuries.webp|thumb|400px|right|
{{legend-line|#F5A623 solid 3px|[[Mortgage loan|30 year mortgage average]]}}
{{legend-line|#F8E71C solid 3px|[[treasury bond|30 Year Treasury Bond]]}}
{{legend-line|#000000 solid 3px| 10 Year Treasury Bond}}
{{legend-line|#9013FE solid 3px| 2 Year Treasury Bond}}
{{legend-line|#4A90E2 solid 3px| 3 month Treasury Bond}}
{{legend-line|#D0021B solid 4px| Effective Federal Funds Rate}}  
{{legend-line|#E786F9 solid 4px| [[United States Consumer Price Index|CPI inflation]] year/year}}
{{color box|lightgrey}} [[List of recessions in the United States|Recessions]]
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Under unusual circumstances, investors will settle for lower yields associated with low-risk long-term debt if they think the economy will enter a recession in the near future. For example, the [[S&P 500 Index|S&P 500]] experienced a dramatic fall in mid 2007, from which it recovered completely by early 2013. Investors who had purchased 10-year Treasuries in 2006 would have received a safe and steady yield until 2015, possibly achieving better returns than those investing in equities during that volatile period.

Economist [[Campbell Harvey]]'s 1986 dissertation<ref>{{Cite web|url=https://faculty.fuqua.duke.edu/~charvey/Research/Thesis/Thesis.htm|title=Campbell R. Harvey's Dissertation|website=faculty.fuqua.duke.edu}}</ref> showed that an inverted yield curve accurately forecasts U.S. recessions. An inverted curve has indicated a worsening economic situation in the future eight times since 1970.<ref>{{Cite web|url=https://faculty.fuqua.duke.edu/~charvey/Term_structure/|title=Index of /~charvey/Term_structure|website=faculty.fuqua.duke.edu}}</ref>

In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a [[flight to quality]] or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. Falling long-term rates in the presence of rising short-term rates is known as "Greenspan's Conundrum".<ref>{{cite web|author1=Daniel L. Thornton|title=Greenspan's Conundrum and the Fed's Ability to Affect Long-Term Yields|url=https://research.stlouisfed.org/wp/2012/2012-036.pdf|website=Working Paper 2012-036A|publisher=FEDERAL RESERVE BANK OF ST. LOUIS|access-date=3 December 2015|date=September 2012}}</ref>