The Yield Curve

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, inverted, flat: each shape is a macro forecast in one line.
NormalInvertedFlatMaturity (3m → 30y)Yield
  • 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.
The 2s10s slope through a policy cycle: flattening as hikes bite, inversion, then the re-steepening that historically arrives near the turn.
InvertedRe-steepening10y − 2y spreadZero (inversion line)Time (one policy cycle)2s10s curve slope

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

An upward-sloping spot curve mathematically implies forwards above it — the market's break-even path for future rates.
Forward ratesSpot (zero) curveMaturityRate

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:

$$ f_{t_1,t_2} \;=\; \frac{r_2 t_2 - r_1 t_1}{t_2 - t_1} $$

Interactive: implied forward rate

Two curve points in, the hidden third number out — the rate the market implies for the period between them.

Implied forward t₁ → t₂
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Curve slope (r₂ − r₁)
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Reading
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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:

$$ \text{Expected 1y return} \;\approx\; \underbrace{y_5}_{\text{carry}} \;+\; \underbrace{(y_5 - y_4)\cdot D}_{\text{roll-down}} \qquad \text{(curve unchanged)} $$

Interactive: carry & roll-down

The bond desk's favourite piece of arithmetic: what a position earns if the curve simply stays where it is.

Carry (yield)
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Roll-down gain
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Total (curve unchanged)
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Rate-rise cushion
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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.

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.