Treasury Yield Curve
A treasury yield curve simply plots dots representing treasury bill, note, and bond yields at each different maturity. When the dots are connected, we have made the yield curve. Yields longer than one year are determined by investors demand: What payment they feel they need to receive at each maturity date for taking the risk that inflation will erode away their earnings at each maturity range.
A treasury yield curve hardly ever “curves” like we imagine a street curving! Instead, it has a “slope,” like a hill. The slope of the yield curve can be “steeper” or “flatter.”
What is depicted here might be called a “normally sloping yield curve.” We call it “normal” because it is the slope or shape that occurs most of the time in the treasury market. It depicts longer-term securities offering higher yields than shorter-term securities.
Compare the solid line to the dotted line: We would say that the curve is “steepening.” This indicates investors are receiving higher yields for longer-term securities than they previously were receiving. This would suggest that inflation has become a bit of a worry for the longer term, and investors need to be paid more to take the risk of investing longer term.
There are many different “shapes” of the yield curve, each meaning something different about investors’ expectations of inflation. Entire books have been written on the subject! This is just one illustration and does not represent current rates.