Yield Curve

The yield curve depicts the yield of all bonds of the same class in relation to their maturities, typically from zero to ten years.

Basically, the bond's interest rate, or yield, depends on the general level of rates; the type of bond (government, emerging markets, corporate); maturity; as well as the rating, which indicates the lender's creditworthiness.

The shorter the time to maturity, the closer the yield gets to the bond's coupon. Typically, the yield curve indicates lower yields the shorter the time to maturity, and moves higher as the time to maturity increases. There are, however, market situations in which the short-term yield is higher than the long-term yield. This so-called "inverted curve" can occur during economic boom cycles.

For new issues, the yield curve serves to align the newly issued bond's coupon with the current dominant market situation.

Private investors can use yield curves to make investment decisions. If investors think interest rates are going to rise, they are more likely to invest in bonds with shorter maturities. They can then shift their investment capital after the rates have gone up.