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yield curve

The yield curve plots the interest rates of bonds, that have equal credit quality, at a set point in time, against differing maturity dates. This curve is used to predict changes in economic output and growth.

There are three main types of yield curve: normal, inverted and flat (or humped).

A normal curve is one in which longer maturity bonds have a higher yield compared with shorter-term bonds due to the risks associated with time. It is upward sloping.

An inverted curve is one in which the shorter-term yields are higher than the longer-term yields. This is downward sloping and can be a sign of upcoming recession.

A flat yield curve (sometimes referred to as a humped curve) is where the shorter and longer-term yields are very close. This is often seen during transitions between normal and inverted curves and so may also be considered to be a sign of moving between certain phases of the economic cycle.

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