Understanding the Yield Curve
The yield curve is one of the most important indicators in finance. It shows the relationship between Treasury bond yields and their time to maturity.
Normal Yield Curve
Slopes upward: longer maturities pay higher yields to compensate for time risk. This is healthy and indicates expected economic growth.
Inverted Yield Curve
Short-term yields exceed long-term yields. This historically predicts recessions within 6-24 months. The 2-year/10-year spread is the most watched.
Flat Yield Curve
Similar yields across all maturities. Often a transitional state between normal and inverted, signaling economic uncertainty.
Key Treasury Maturities
- 3-Month T-Bill: Proxy for the Federal Reserve's interest rate target
- 2-Year Note: Reflects expectations for near-term Fed policy
- 10-Year Note: The most important rate in finance. Drives mortgage rates, corporate bond yields, and stock valuations
- 30-Year Bond: Reflects long-term inflation and growth expectations
How This Affects Your Investments
- Stocks: Higher yields = higher discount rates = lower stock valuations (all else equal)
- Bonds: Rising yields = falling bond prices. Buy when yields are high.
- Mortgages: The 30-year mortgage rate closely tracks the 10-year Treasury
- Savings: Higher Treasury rates mean better savings account and CD rates