A yield curve is a graphical representation of the yield on a particular type of bond, based on its maturity date. A normal yield curve shows a gradual increase in yield for bonds that mature further in the future, since it is riskier to hold the bonds for a longer period of time. An inverted yield curve presents a declining yield for bonds with longer maturities, which is typically triggered by an expectation that a recession will occur in the future. A flat yield curve is most likely during economic transition periods, when investors are uncertain about whether rates will rise or fall. Thus, it can be used to predict changes in the economy.
The yield curve is most commonly constructed for the debt of the U.S. Treasury, comparing the yields of securities that mature in a range of three months to 30 years. The result is then used as a benchmark, which is compared to the yields associated with other bonds.