Understanding a flattening yield curve
A yield curve is a graph that shows the relationship
between yields and maturity dates for a given time. Under normal
circumstances, the longer it takes for a CD, bond or other investment
to mature, the greater the yield. When economic forces cause a shorter
maturity to produce a greater yield than a long maturity, the yield
curve is said to be inverted.
The charts below illustrate a yield curve that is
flattening. Yields for short-term maturities, such as the one-year
and five-year Treasuries, are rising faster than the yield for the
10-year Treasury. In fact, in this example, the yield for the 10-year
is dropping over time and that makes the flattening yield curve
even more pronounced.