The yield curve is flattening (or growing steeper)! … Yield curve spreads are widening (or narrowing)! … The yield curve has inverted (or normalized)!

What is a yield curve to begin with, and what does it have to do with you and your investments?

A Tour Around the Curve

Yield curves typically depict the various yields across the range of maturities for a particular bond class. For example, a U.S. Treasury bond with a 5-year maturity might be yielding 4.0% annually, while a 30-year Treasury bond could be yielding 4.8%.

Bond class – A bond class or type is typically defined by its credit quality. Backed by the full faith of the U.S. government, U.S. Treasury yield curves are among the most frequently referenced, and often serve as a high-quality benchmark for other bond types—such as municipal bonds, corporate bonds, or other government instruments.

Term/Maturity – The data points along the bottom X axis of a curve represent various terms available for a bond class. The term is the length of time you’d need to hold a bond before your loan matures and you should receive your initial investment back.

Yield – The data points along the vertical Y axis represent the interest rate, or yield to maturity currently being offered—such as 4% per year, 5% per year, and so on. The yield curve for any given bond class changes every time its yields change—which can be frequently.

Spread – The spread is the difference between the annual yields on two bond maturities. For example, if 2-year and 10-year Treasury yields are 3.9% and 4.4%, respectively, the spread is 0.5%.

To view the most current yield curve data, visit the U.S. Treasury yield curve resource.

Define “Normal”

The shape of the yield curve helps us see the relationship between various term/yield combinations available for any given bond class at any given point in time.

Just as our body temperature is optimal around 98.6°F (37°C), there’s a preferred equilibrium between bond market terms and yields. “Normal” occurs when short-term bonds yield less than their longer-term counterparts. Investors expect to be compensated with a term premium for the added uncertainty of longer maturities.

Typically, the further out you go on it, the less extra yield is available—this is known as the law of diminishing returns. A normal yield curve starts steep and then flattens out over longer terms.

Variations on the Curve

The shape of the yield curve reflects evolving investor sentiment about economic conditions. According to expectations theory, this curve is shaped by investor expectations about future interest rates:

• If rates are expected to rise, the curve slopes upward.
• If rates are expected to fall, the curve may invert.
• If rates are expected to remain stable, the curve may flatten.

As of May 2025, the yield curve has shown signs of normalization. The 10-year minus 2-year Treasury spread recently turned positive again, measuring 0.52% as of early May, after an extended inversion period. This shift suggests investors may be anticipating more stable economic conditions ahead.

You, the Yield Curve, and Your Investments

An inverted yield curve—when long-term yields drop below short-term ones—is rare but can occur during tightening monetary policy. Historically, inversions have sometimes preceded recessions, though not always and not immediately.

Should you shift your entire investment strategy in response to the curve? Probably not. Yield curves are just one of many economic indicators.

Instead, they’re best used to inform and refine your long-term, evidence-based investment strategy—not to override it.

Big picture, this typically means investing in bonds that offer the highest yield for the least amount of term, credit, and call risk. (Call risk is when a bond issuer repays the bond early, which may leave investors needing to reinvest at lower rates.)

A Note on Methodology

As of December 2021, the U.S. Treasury transitioned to using the monotone convex (MC) spline method to derive its official yield curves. This newer method enhances the accuracy and consistency of the yield curve’s shape, improving how yields are interpreted across maturities.

The Takeaway

The yield curve remains a powerful tool for gauging market sentiment and planning fixed-income strategies. Whether investing directly in bonds or through bond funds, the principles of risk management, diversification, and disciplined execution remain essential.

In short, it’s fine to consider the yield curve, but it’s best to look past it to the distant horizon as you invest toward your financial goals.

We’re happy to walk through what that looks like for your portfolio. Reach out to us at any time to learn more about how fixed income investing fits into your broader financial plan.