Treasury Yield Curve

Definition: The U.S. Treasury yield curve compares the yields of short-term Treasury bills with long-term Treasury notes. Treasury bills are issued for terms less than a year. Treasury notes are issued in terms of 2, 3, 5, and 10 years.Treasury bonds are issued in terms of 30 years. They are all called "notes" or "Treasuries" for short.

Treasury notes are sold at auction by the Treasury Department, which sets a fixed face value and interest rate. High demand for the note will drive the price above the face value. This decreases the yield, because the government will only pay back the face value plus the stated interest rate. If, on the other hand, there is poor demand, then the bidders will pay less than the face value, increasing the yield. That's why yields always move in the opposite direction of Treasury bond prices. Treasury yields change daily, because they are resold on the open market.

Usually, the longer the time frame on a Treasury product, the higher the yield. Investors require a higher return for keeping their money tied up for a longer period of time. This is known as the yield curve. On July 6, 2010, the yield curve was:

• .17 for the 3-month Treasury bill,
• .32 for the 1-year Treasury note,
• 1.76 for the 5-year Treasury note,
• 2.95 for the 10-year Treasury note, and
• 2.89 for the 30-year Treasury bond.

When the yields are low like this, it's known as a flat yield curve. This shows that investors expect slow growth. A rising yield curve is when investors are confident, and shy away from long-term notes, causing those yields to rise steeply. This means the economy will grow quickly. An inverted yield curve is when short-term yields are higher than long-term yields. This usually forecasts a recession.