For use of embedding in an educational site. Hit refresh each day to see the exact formation of the yield curve, in real time. According to Investopedia, the yield curve graphs the relationship between bond yields and bond maturity. More specifically, the yield curve captures the perceived risks of bonds with various maturities to bond investors.
The U.S. Treasury Department issues bonds with maturities ranging from one month to 30 years. As bonds with longer maturities usually carry higher risk, such bonds have higher yields than do bonds with shorter maturities. Due to this, a normal yield curve reflects increasing bond yields as maturity increases. Figure 1 shows a normal yield curve.
However, the yield curve can sometimes become flat or inverted. In a flat yield curve, short-term bonds have approximately the same yield as long-term bonds. An inverted yield curve reflects decreasing bond yields as maturity increases. Such yield curves are harbingers of an economic recession. Figure 2 shows a flat yield curve while Figure 3 shows an inverted yield curve.
How is the yield curve helpful?
We mention in the “Yield Curve Definition” section that historically, economic recessions occur when the spread between the 10-year yield and the one-year yield is less than zero. If you look carefully at the historical spread chart (see Figure 6) or the interactive chart (see Figure 7), you will notice gray bars throughout the charts. These bars indicate the past U.S. recessions since 1967.
A quick look at Figure 6 suggests that an economic recession generally follows once the yield spread drops below 0% (the red Y-axis). This is especially true for recessions during the late 1900s. The yield spread reached an all-time low of -3.10% around April 1980, during the economic recession of the early 1980s.
According to a GuruFocus Forum post, one limitation of Warren Buffett (Trades, Portfolio)’s market indicator is that it only tells you how overvalued the U.S. market is and the expected return of the market in the next eight years. An inverted yield curve, on the other hand, has historically predicted the past economic recessions according to the yield curve page.
The U.S. Treasury Department issues bonds with maturities ranging from one month to 30 years. As bonds with longer maturities usually carry higher risk, such bonds have higher yields than do bonds with shorter maturities. Due to this, a normal yield curve reflects increasing bond yields as maturity increases. Figure 1 shows a normal yield curve.
However, the yield curve can sometimes become flat or inverted. In a flat yield curve, short-term bonds have approximately the same yield as long-term bonds. An inverted yield curve reflects decreasing bond yields as maturity increases. Such yield curves are harbingers of an economic recession. Figure 2 shows a flat yield curve while Figure 3 shows an inverted yield curve.
How is the yield curve helpful?
We mention in the “Yield Curve Definition” section that historically, economic recessions occur when the spread between the 10-year yield and the one-year yield is less than zero. If you look carefully at the historical spread chart (see Figure 6) or the interactive chart (see Figure 7), you will notice gray bars throughout the charts. These bars indicate the past U.S. recessions since 1967.
A quick look at Figure 6 suggests that an economic recession generally follows once the yield spread drops below 0% (the red Y-axis). This is especially true for recessions during the late 1900s. The yield spread reached an all-time low of -3.10% around April 1980, during the economic recession of the early 1980s.
According to a GuruFocus Forum post, one limitation of Warren Buffett (Trades, Portfolio)’s market indicator is that it only tells you how overvalued the U.S. market is and the expected return of the market in the next eight years. An inverted yield curve, on the other hand, has historically predicted the past economic recessions according to the yield curve page.
