This term depicts the relationship that exists betwixt interest rates and different maturity terms. When graphed, this term is referred to as the yield curve and plays an essential purpose in the identification of an economy's state. It also gives predictions on the future state of the economy to the market participants. Essentially, the yields increase linearly with maturity. This linear growth gives rise to an upward-sloping, downwards-sloping, and flat curves.
A curve that slopes upwards shows that the long terms yields are higher than the short-run yields. This curve is considered as usual and shows that the economy is expanding. The investors frequently demand high rates of interest for long run investments as compensation for more extended periods. This behavior explains why the yields curve is mostly upward-sloping. The downward-sloping curve indicates that short-run yields are higher than the long-run yields. Such depicts a weak economy that is about to go through a recession. This tread can be due to the fall in demand for US treasuries. A flat curve shows no variations in short and long-term yields and indicates uncertainty about the economy's direction.
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The most used yields curves compare three months, two-year, five-year, ten-years, and thirty-year US treasury debts. These curves become the credit market’s benchmark as there are the yields of risk-free fixed investments. In the credit industry, banks and lenders utilize this curve analysis to determine the lending and savings rate. The treasury yields curves are mostly influenced by federal funds rates though others are developed compared to credit investments with similar risks.
