Level Yield Curve

Level Yield Curve

A yield curve in which the long- and short-term yields on bonds are largely the same. A normal yield curve trends upward because bondholders expect a larger interest rate for a longer investment. If the yield curve levels, it indicates that bondholders are willing to except a lower long-term interest rate because they are uncertain about the future direction of the economy and would prefer to guarantee their interest rates in the present. A level yield curve may become an inverted yield curve, indicating an expected economic downturn.

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Level yield curve. A level yield curve results when the yield on short-term US Treasury issues is essentially the same as the yield on long-term Treasury bonds.

You create the curve by plotting a graph with yield on the vertical axis and maturity date on the horizontal axis and connecting the dots.

In most periods, the yield on long-term bonds is higher and the yield curve is positive because investors demand more for tying up their money for a longer period.

There are also times, when short-term T-bills yields are higher, that the pattern is reversed and the yield curve is negative, or inverted.