Yield Curve
A line plotting interest rates of bonds with equal credit quality but differing maturity dates, used as an economic indicator.
Example
A normal yield curve shows longer-term bonds paying higher rates than shorter-term ones; when that flips — short-term rates higher than long-term — it's called an inverted yield curve, historically watched as a recession warning signal.
Common Misconception
An inverted yield curve is a statistical warning sign, not a precise timer — inversions have preceded past recessions, but the lag between inversion and recession has varied from months to over a year, so it isn't a reliable short-term trading signal.
Why It Matters
The yield curve directly affects borrowing costs across the economy — part of why mortgage rates, auto loan rates, and savings account yields all shift when the Federal Reserve changes short-term rates.