The yield curve is a graph that plots the yields or interest rates of bonds having equal credit quality but differing maturity dates. Looking at similar groups of bonds and their relationship over time allows investors to both get a flavour of how bond markets broadly view the economic environment and compare the specific yields that bonds of various duration offer.
The yield curve is often used as a shorthand expression for the yield curve of government bonds with the slope of the yield curve giving the market insight into the likelihood of future interest rate changes and economic activity. There are three main shapes of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat. These slopes of the yield curve provide an important signal of investors' expectations for future interest rates, and by extension their expectations for future economic growth and inflation.
A yield curve sloping upwards is generally a positive for investors as economic conditions are expected to be better in the future. However, a flattening curve generally indicates the opposite – a slowing of the economy – where the future yield looks less promising. As a result, the yield curve is considered a “leading indicator” of future economic growth and inflation.