Bond Yield

Reading a Yield Curve

You've probably seen financial commentators talk about the Treasury Yield Curve when discussing bonds and interest rates. It's a handy tool because it provides, in one simple graph, the key Treasury bond data points for a given trading day, with interest rates running up the vertical axis and maturity running along the horizontal axis.

A typical yield curve is upward sloping, meaning that securities with longer holding periods carry higher yield.

In the yield curve above, interest rates (and also the yield) increase as the maturity or holding period increases—yield on a 30-day T-bill is 2.55%, compared to 4.80% for a 20-year Treasury bond—but not by much. When an upward-sloping yield curve is relatively flat, it means the difference between an investor's return from a short-term bond and the return from a long-term bond is minimal. Investors would want to weigh the risk of holding a bond for a long period (see Interest Rate Risk) versus the only moderately higher interest rate increase they would receive compared to a shorter-term bond.

Indeed, yield curves can be flatter or steeper depending on economic conditions and what the Federal Reserve Board is doing, or what investors expect the Fed to do, with the money supply. A flattened positive yield curve means there's little difference between short-term and long-term interest rates. Sometimes economic conditions and expectations create a yield curve with different characteristics. For instance, an inverted yield curve slopes downward instead of up. When this happens, short-term bonds pay more than long-term bonds. Yield curve watchers generally read this as a sign that interest rates may decline.

The Department of Treasury provides daily Treasury yield curve rates, which can be used to plot the yield curve for that day.