Humped Yield Curve


The financial investing term humped yield curve refers to a bell-shaped curve, indicating mid-term rates that exceed both long and short term rates.  When debt of similar credit quality, such as that issued by the U.S. Treasury Department, result in a humped yield curve it's typically interpreted as a slowing of the economy.


Also known as the term structure of interest rates, yield curves are typically used depict the relationship between interest rates and the time to maturity of a debt security such as a bond.  The shape of the curve provides the analyst-investor with insights into the future expectations for interest rates, as well as a possible increase or decrease in macroeconomic activity.  Yield curves are simple line plots showing the term, or maturity, on the x-axis (horizontal axis) and the corresponding rate of interest, or yield, on the y-axis (vertical axis).  When plotting a yield curve, the securities should be of similar, if not identical, credit quality.

As the illustration below demonstrates, a humped yield curve at shorter maturities has a positive slope, and then a negative slope as maturities lengthen.  This results in what is also referred to as a bell shaped curve.  Humped yield curves are rare, and when debt issued by the U.S. Treasury Department results in this type of curve, it's typically interpreted as a signal the economy is slowing down.  As is the case with a flattened curve, a humped yield curve cannot be explained by market theories and is a transitional state.

For example, if the returns on five year debt were higher than two and ten year debt, individuals would not choose to invest in the longer-term security, since they are not being compensated for the additional risk they're assuming.  This lack of investor interest in longer-term debt would eventually drive their returns higher.  In the same way, investors would flock to mid-term debt, eventually driving rates down.


The following illustration demonstrates the shape of a normal versus humped yield curve.

Humped Yield Curve

Related Terms

yield curve, normal yield curve, inverted yield curvesteep yield curve, flattened yield curve, backwardation, contango