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A yield curve is a line that plots the interest rates of bonds with similar credit quality but different maturity dates. The slope of the yield curve provides an indication of future economic activity and potential interest rate changes. The yield curve is used as a benchmark for mortgage rates and bank lending rates; it is also used to predict changes in economic growth. There are three key types of yield curves: normal, inverted, and flat.
The most commonly reported and monitored yield curve compares the three-month, two-year, five-year, 10-year and 30-year U.S. Treasury bills. A yield curve is considered normal when longer maturity bonds have a higher yield relative to shorter-term bonds, because of the risks associated with time.
An inverted yield curve can indicate a potential or near-term recession, and can be identified by shorter-term bonds with a higher yield compared to long-term bonds with lower yields. A flat or humped yield curve, with shorter- and longer-term yields close in value, is considered a predictor of an economic transition.