The U.S. Treasury Department issues investment instruments in the form of bills, notes and bonds. The maturity of these instruments varies from one month to thirty years, where a “short-term” instrument typically has a maturity of less than one year and a “long-term” instrument has a maturity longer than one year. Interest rates on these bonds also vary, where typically bonds with longer maturities have higher interest rates. A yield spread is the difference in yield (or interest earned) between two investment instruments. Moreover, the spread between the 10-year Treasury and the Fed Funds rate is a component of the Leading Economic Indicators Index, provided by the Conference Board. The U.S. Treasury yield curve represents different Treasury instruments by maturity and their corresponding yields and typically has a positive slope, as exemplified by the 2013-2014 period.
A positive yield curve shows that longer-term bonds are associated with higher yields, as investors buying the debt substitute higher returns (in the form of interest payments) in exchange for lending money and assuming risk for a longer period of time. A negative yield curve (when the short-term yield is higher than longer term yield) is called an inverted yield curve (Figure 2). In the past, an inverted yield curve has been thought to be a good predictor of recessions.3 The reasoning behind this is that as short-term yields rise above long-term yields, it is implied that investors consider short-term investments to be of higher risk than long-term investments. As a result, investors want a higher return for assuming more risk in the short run and would be less willing to lend at lower rates for longer periods.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.