Understanding Yield Curves

What curve shapes tell us about the future

6 min read

What can the yield curve tell us about the future?

What is a Yield Curve?

A graph plotting yields (y-axis) against maturities (x-axis) for securities of the same credit quality.

Yield Curve Shapes

Shape	Description	Economic Signal
Normal (Upward)	Longer maturities yield more	Economic growth expected
Flat	All maturities yield similarly	Uncertainty; transition period
Inverted	Short-term yields exceed long-term	Recession warning
Steep	Large gap between short and long yields	Recovery expected

Normal Curve Explained

Investors demand higher yields for locking up money longer (term premium). Markets expect growth and possibly higher future rates.

Inverted Curve Explained

Markets expect central bank to cut rates in the future (often due to recession). Short-term rates are elevated, but long-term rates fall as investors anticipate cuts.

The German Bund Curve

Serves as the risk-free curve for the eurozone
Key tenors: 2Y (Schatz), 5Y (Bobl), 10Y (Bund), 30Y (Bund)
ECB policy directly affects the short end; market expectations drive the long end

Curve Trades

Steepener: Profit if curve steepens (long end rises vs. short end)
Flattener: Profit if curve flattens
Professional investors actively trade curve shape changes

HISTORICAL EXAMPLE

2022: ECB began hiking rates → short-end rose sharply → curve inverted. Inversion persisted into 2023-2024. Historical signal: Inversions often precede economic slowdowns.

KEY TAKEAWAY

The yield curve is the market's collective forecast for interest rates and economic conditions. Learn to read it.

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