The Yield CurveSome background helps
One line, drawn from overnight to 30 years — the bond market's forecast, the economy's mood ring, and a P&L engine in its own right.
What the curve is
Plot the yield of the same borrower — usually the government — at every maturity from overnight to 30 years, and connect the dots. That line is the yield curve: the price of time itself. Every bond, swap, loan and mortgage in this atlas prices off some point on it, which is why no other single picture in finance carries as much information.
- The short end (0–2 years) is the central bank's territory: it sits wherever policy rates and near-term expectations put it.
- The long end (10–30 years) belongs to the market: expected future policy plus inflation risk plus a term premium for tying money up.
- The belly (2–10 years) is where the two views negotiate — and where most trading happens.
The three shapes and what they say
- Normal (upward) — investors are paid for time and inflation risk; the economy's default state.
- Flat — tightening is biting; the market sees the cycle maturing.
- Inverted — short rates above long: the market expects cuts. Inversion has preceded every US recession of the past half-century, with lead times of 6–24 months and one or two famous false alarms. It is the most-watched recession signal in finance — and, because everyone watches it, endlessly argued about.
Professionals compress the shape into spreads: 2s10s (10-year minus 2-year) and 3m10y are the standard gauges. The re-steepening after inversion — not the inversion itself — has historically been the loudest part of the signal: it usually means cuts are imminent or under way.
The forward curve: what today's curve implies about tomorrow's
Inside every spot curve hides a second curve. Because the 2-year rate must equal the 1-year rate compounded with the implied "1-year rate, 1 year forward", the curve's shape is a forecast — extractable with arithmetic:
What the symbols mean
- ta point in time
- rthe interest rate, per year
Interactive: implied forward ratePractitioner
Two curve points in, the hidden third number out — the rate the market implies for the period between them.
- Implied forward t₁ → t₂
- —
- Curve slope (r₂ − r₁)
- —
- Reading
- —
The trading corollary: "rates will rise" is not a view — rates will rise by more than the forwards already price is. Positions profit against the forward path, not against today's level.
Carry and roll-down: how the curve pays you
A positively sloped curve pays bondholders twice. Carry: the bond's yield itself. Roll-down: as a 5-year bond becomes a 4-year bond, it gets repriced at the (lower) 4-year yield — a capital gain earned purely by time passing, as the bond "rolls down" the curve toward the short end:
What the symbols mean
- ythe yield to maturity
- Dduration: how far a bond's cash flows sit in the future
Interactive: carry & roll-downPractitioner
The bond desk's favourite piece of arithmetic: what a position earns if the curve simply stays where it is.
- Carry (yield)
- —
- Roll-down gain
- —
- Total (curve unchanged)
- —
- Rate-rise cushion
- —
The cushion converts the total into basis points of yield rise the position can absorb in a year before losing money. Carry-and-roll is why steep curves make bond desks cheerful — and why flat curves make them trade curve shape instead.
The real curve and breakeven inflation
Nominal bonds and inflation-linked bonds of the same maturity imply the inflation rate at which both pay the same — the market's forecast, readable off two curves.
Interactive: breakeven inflationPractitioner
Nominal yield in, real yield in, the market's inflation expectation out — then compare it with your own.
- Breakeven inflation
- —
- Rule of thumb (n − r)
- —
- Your view vs. market
- —
- Which bond wins
- —
Exactly: (1+n)/(1+r) − 1. Breakevens also carry an inflation risk premium and a liquidity discount, so they are a forecast plus noise, not a clean one — but they are the only continuously traded inflation expectation that exists. See inflation-linked bonds.
Trading the shape itself
- Steepener: long the short end, short the long end — profits when the gap widens (classic post-inversion trade, often via STIR futures and bond futures).
- Flattener: the reverse — profits when hikes squeeze the curve together.
- Butterfly: belly versus wings (long 5y vs short 2y+10y, or reverse) — a bet on the curve's curvature, hedged against level and slope.
- All are built duration-neutral in DV01 terms, so only the shape pays — the level cancels. The rates page has the toolkit.
Which curve? A user's guide
- Government curve — the classic; anchors "risk-free" pricing (see government bonds).
- Swap / OIS curve — what derivatives actually discount with since the multi-curve revolution (see OIS and basis swaps).
- Credit curves — each issuer has its own curve of spreads on top; the gap between them is the subject of the spread measures concept page.
- Real curve — from inflation-linked bonds; nominal minus real = breakeven inflation, the market's inflation forecast, read off two curves.
Information and education only. This page explains a mechanism in general terms, using simplified textbook models and illustrative figures. It is not advice, not a recommendation, and not a valuation you can rely on. Conventions and rules differ by market and jurisdiction and change over time.