What is Yield Curve?
The yield curve is the bond market's crystal ball — its shape tells you what millions of investors collectively expect about inflation, growth, and monetary policy. A normal curve slopes upward; an inverted curve often predicts recession.
The yield curve is a graph showing yields of bonds with the same credit quality but different maturities. It typically plots government bond yields from short-term (3 months) to long-term (30 years). The curve's shape reveals market expectations about future interest rates and economic conditions.
Yield Curve Shapes
Normal (upward sloping): Long rates higher than short — investors demand more for longer lockups. Flat: Short and long rates similar — transition period, uncertainty. Inverted: Short rates higher than long — markets expect rate cuts, often predicts recession.
The German Yield Curve
Germany's yield curve runs from Bubills (3-12 months) through Schatze (2Y), Bobls (5Y), to Bunds (10Y, 30Y). It's the Euro benchmark curve because German bonds are the safest Euro-denominated assets. Other Eurozone spreads are measured against it.
Reading the Curve
Steepening curve: Markets expect higher future rates (growth, inflation). Flattening curve: Rate hikes expected to slow growth. Inversion: Markets betting on rate cuts — historically precedes recessions. The 2Y-10Y spread is the most watched segment.
Yield Curve Shapes and Meanings
| Shape | Appearance | Typical Interpretation | Historical Signal |
|---|---|---|---|
| Normal | Upward sloping | Healthy economy, growth expected | Expansion |
| Steep | Sharply upward | Strong growth/inflation expected | Early recovery |
| Flat | Horizontal | Uncertainty, transition | Late cycle |
| Inverted | Downward sloping | Recession expected | Preceded all US recessions since 1955 |
Practical Example: Reading the German Curve
Current German curve: 3-month Bubill 3.5%, 2-year Schatz 2.8%, 5-year Bobl 2.5%, 10-year Bund 2.4%. The short end is higher than the long end — an inverted curve. This suggests markets expect the ECB to cut rates because they anticipate economic slowdown.
Frequently Asked Questions
What is a yield curve in simple terms?
A yield curve plots interest rates for bonds of different maturities. It shows whether short-term or long-term bonds pay more — and that shape tells us what markets expect about the economy.
Why does an inverted yield curve predict recessions?
Inversion means investors accept lower long-term yields than short-term — they're betting rates will fall. Rates typically fall when central banks cut to fight recession. The inversion reflects that expectation.
How do I use the yield curve for investing?
Steep curve: Consider locking in longer-term bonds before rates rise further. Inverted curve: Short-term bonds may outperform; consider staying short or using a ladder strategy.
What's the 2s10s spread?
The difference between 10-year and 2-year yields — the most watched yield curve indicator. When it goes negative (2-year yields more than 10-year), the curve is inverted.
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