The financial investing term normal yield curve refers to an upward sloping line plot used to illustrate the interest rate differences between short and long-term debt instruments. Debt securities issued by the U.S. Treasury Department typically exhibit a normal yield curve, whereby the interest rates paid on securities with shorter maturities is lower than rates paid on debt with longer maturities.
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 possible increases or decreases in macroeconomic activity. Yield curves are line plot 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.
There are several types of yield curves, and the shape of the curve provides the analyst-investor with insights into the future expectations for interest rates, as well as possible increases or decreases in macroeconomic activity. As the illustration below demonstrates, a normal yield curve has a positive slope that is asymmetrical; the returns on longer maturities increase at a progressively slower rate. This shape has at least three possible explanations:
The following illustration demonstrates the shape of a normal yield curve.