Yield curve

The yield curve shows, at a single moment, what it costs a borrower to borrow for different lengths of time. It is normally drawn for a government's own bonds, from short-term bills of a few months out to bonds of thirty years or more, so that credit risk is held roughly constant and only maturity varies. Short-term yields are anchored closely by the central bank's policy rate. Longer yields reflect expected future short-term rates, expected inflation and an extra return, the term premium, that investors demand for tying money up for longer.

Its shape carries information. A normal, upward-sloping curve, with long yields above short ones, is typical when growth is expected to continue. A flat curve suggests uncertainty, and an inverted curve, where short yields exceed long ones, suggests markets expect rates to fall, often because they expect the economy to weaken. The curve also matters practically: it is the reference point for mortgage rates, corporate borrowing costs and the choice between short and long bonds. Remember that it describes today's prices, not a forecast that will necessarily come true.