What is a yield curve?
A yield curve is a graph illustrating the return on bonds that mature after various time periods, typically from 3 months to 30 years. It acts as a useful reference for investors to help them boost their total returns. Yield curves are also good indicators of worldwide economic activity.
Where have you heard about yield curves?
Each country has its own yield curve, which it uses to predict changes in economic output and growth. Mortgage interest rates and other lending rates also follow the curve. The Bank of England estimates yield curves for the UK on a daily basis.
What you need to know about yield curves.
Understanding a yield curve can help you achieve better bond investment results. One axis of the curve shows interest rates, while the other represents time until maturity.
Short-term bonds generally offer a lower yield, while longer-term bonds offer higher rewards. When this is the case, you’ll see the yield curve sloping upwards on the graph.
In exceptional circumstances, the yield curve can become inverted. This occurs when short-term bonds actually yield more than longer-term ones, and can be a sign that a recession is about to hit.
Several factors can influence movements on the yield curve, including interest rates, inflation, economic growth forecasts and investors’ general attitude toward risk.