Yield Curve Theory

Yield curve theory refers to the relationship between interest rates and the maturity of debt securities, typically government bonds. It is often visualized as a graph that plots interest rates on the vertical axis against the time to maturity on the horizontal axis. A normal yield curve slopes upward, indicating that longer-term bonds have higher rates due to increased risk over time. An inverted curve suggests that short-term rates are higher than long-term rates, often signaling economic slowdown. Analysts use the yield curve to predict future interest rates, inflation, and economic activity, making it a crucial financial tool.