What to Know About Yield Curves and Why ‘Inversions’ Are Scary

The Treasury yield curve is front and center in many investors’ minds after once again being flipped upside down. This so-called inversion, as it’s often called, is seen by some as an important signal for the US economy and markets. When it happens, analysts, journalists and investors tend to spill a lot of ink in trying to decipher it. But it can be a complicated subject, especially given there’s more than one curve, and different curves can sometimes tell different stories. So if you’re wondering just what a yield curve even is, why there’s so much focus on and what it potentially tells us about the world -- you’re not alone.

Bond yields are an expression, in annual percentage terms, of the rate of return you expect to get on a particular fixed-income security. And the gap between yields on different maturity instruments is known as a yield curve. It’s a way to show the difference in the compensation investors are getting for choosing to buy a shorter-term instrument versus longer-term debt. Most of the time, investors demand more for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward.