Interest Rates & the Economy

The yield curve is a graph with the rates of U.S. Treasury bonds plotted by maturity. The slope of the curve is the difference between short-dated bonds and long-dated bonds. Normally, it curves upward as investors demand higher yields to compensate for the risk of lending money over a longer period. The curve flattens, however, when the rates converge.

Investors pay attention to the yield curve to identify buying opportunities in the bond market and because it has a history of forecasting economic growth. A flat yield curve suggests that inflation and interest rates are expected to stay low for an extended period of time, signaling economic weakness. A steep curve indicates stronger growth ahead.

In the first week of December 2018, the difference between 10-year and two-year Treasury yields — an indicator that tends to be closely watched by investors — was the narrowest since 2007, though still positive. The flattening yield curve was partly to blame for a year-end spike in stock market volatility, because some economists and investors took it as a warning that the odds of an economic downturn were increasing.