The yield curve and interest rates
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
5 min read · updated July 8, 2026
Interest rates are not a single number. There is a different rate for lending money for three months than for lending it for ten years, and the map of all those rates is one of the most watched pictures in finance. Once you can read it, a lot of market headlines stop being mysterious.
Start with the building block. When you buy a bond, you are lending money and getting paid to wait. The bond yield is the annual return you earn if you buy the bond and hold it until it pays you back in full. So a 2-year government bond yielding 4.5% means an investor who holds it to maturity, the date the loan comes due, earns about 4.5% a year on their money. Higher yield, more return for the lender, and also more the borrower has to pay.
Plotting yields against time
Now line up government bonds of different maturities and plot each one's yield against how long until it matures. That plot is the yield curve. It usually runs from very short maturities like a 3-month bill out to very long ones like a 30-year bond.
We use government bonds for this because they are treated as essentially free of default risk, so the curve shows the price of time alone, stripped of the risk that a particular company might not pay you back. The numbers below are illustrative yields, in percent, for a normal curve:
| Maturity | Yield |
|---|---|
| 3-month | 4.0 |
| 2-year | 4.5 |
| 10-year | 4.8 |
| 30-year | 5.0 |
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Frequently asked
- What is the yield curve?
- The yield curve plots the yields of government bonds against how long until they mature, running from short maturities like a 3-month bill out to a 30-year bond. It uses government bonds because they carry essentially no default risk, so the curve shows the price of time alone, stripped of company-specific risk.
- What does an inverted yield curve signal?
- An inverted curve, where long-term yields fall below short-term yields, is a classic recession warning. It has preceded almost every US recession in recent decades. It typically means the Fed has pushed short rates high to cool the economy while investors, expecting weaker growth and rate cuts ahead, accept lower long-term yields.
- How does the yield curve affect valuations?
- Every valuation starts with a risk-free rate, which is just a yield off the government curve. Move the curve and you move the discount rate applied to every future cash flow, so valuations shift across the market. When the curve rises, the discount rate lifts and present values fall, which also cools M&A and financing activity.
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