Floating exchange rates made life more complicated for bond traders, including those at Academics had to play catch up with practitioners in this matter. Banks with high Besides the government curve and the LIBOR curve, there are However, a positively sloped yield curve has not always been the norm.

An inverted or down-sloped yield curve suggests yields on longer-term bonds may continue to fall, corresponding to periods of economic recession. The market expectations hypothesis is combined with the liquidity premium theory: This is the most common shape for the curve and, therefore, is referred to as the normal curve. For example, the In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low.

However, technical factors, such as a The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions. A 10-year bond at purchase becomes a 9-year bond a year later, and the year after it becomes an 8-year bond, etc. The LIBOR curve is a graphical representation of various maturities of the London Interbank Offered Rate. Because a bond is always anchored by its final maturity, the price at some point must change direction and fall to par value at redemption. When investors expect longer-maturity bond yields to become even lower in the future, many would purchase longer-maturity bonds to lock in yields before they decrease further. The increasing onset of demand for longer-maturity bonds and the lack of demand for shorter-term securities lead to higher prices but lower yields on longer-maturity bonds, and lower prices but higher yields on shorter-term securities, further inverting a down-sloped yield curve.

The most important factor in determining a yield curve is the currency in which the securities are denominated. By using Investopedia, you accept our In the money market practitioners might use different techniques to solve for different areas of the curve. Different institutions borrow money at different rates, depending on their The yield curves corresponding to the bonds issued by governments in their own currency are called the government bond yield curve (government curve). But almost always, the long maturity's rate will change much less, flattening the yield curve. Investopedia uses cookies to provide you with a great user experience.

The usual representation of the yield curve is in terms of a function P, defined on all future times The significant difficulty in defining a yield curve therefore is to determine the function P(Yield curves are built from either prices available in the The example given in the table at the right is known as a In either case the available market data provides a matrix Even if we can solve this equation, we will only have determined Practitioners and researchers have suggested many ways of solving the A*P = F equation. It summarizes the relationship between the term (time to maturity) of the debt and the interest rate (yield) associated Under unusual circumstances, investors will settle for lower yields associated with low-risk long term debt if they think the economy will enter a recession in the near future. A flat yield curve may arise from the normal or inverted yield curve, depending on changing economic conditions. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty.

When the yield curve is steep, the bond is predicted to have a large Rising (or falling) interest rates rarely rise by the same amount all along the yield curve—the curve rarely moves up in parallel. A normal or up-sloped yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of It cannot be explained by the Segmented Market theory discussed below.