What is Yield Curve?

Full Definition

A yield curve plots the interest rate (yield) on a set of bonds -- most commonly UK government bonds, or gilts -- of similar credit quality against how long each bond has left to run before it matures, showing at a glance whether longer-term borrowing costs more or less than shorter-term borrowing at a given point in time. A "normal" upward-sloping yield curve, where longer-term yields are higher than short-term yields, reflects investors generally demanding extra compensation for tying up money for longer and taking on more uncertainty about future inflation and interest rates. An "inverted" yield curve, where short-term yields are higher than long-term yields, is watched closely by economists and investors because it has historically often, though not always, preceded a recession, since it can reflect markets expecting interest rates -- and often growth -- to fall in the future. The gilt yield curve also matters directly for UK mortgage and savings rates, since fixed-rate mortgages and fixed savings bonds are typically priced with reference to the relevant point on the swap-rate or gilt yield curve rather than only the Bank of England base rate, which is why fixed mortgage rates can move even between base rate decisions, in response to shifts in the wider bond market.

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