Glossary / Markets

Yield curve

The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk.

An upward sloping curve is the normal state: longer lending pays more. A flat or inverted curve, where short rates exceed long ones, has historically preceded recessions.

Which end moves matters more than the direction. Short rates are largely set by the central bank; long rates are set by the market.

Where people get it wrong

Reading a steepening as one thing. Steepening because short rates fell is a growth story. Steepening because long rates rose is a risk story.

Related terms

Term premium Term premium is the extra yield investors demand for holding a long dated bond rather than rolling short dated ones, compensating for the uncertainty of committing money for decades. Basis point A basis point is one hundredth of a percentage point, so one hundred basis points equals one percent, and it exists because saying a rate rose one percent is ambiguous between one percentage point and one percent of the rate. Real yield Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning.

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