Yield curve shapes: drag the curve
A yield curve plots the yield on one issuer's bonds against how long each bond has left to run. Drag the point at any maturity to reshape it and the tool names the shape. The illustrative default rises from 4.20 percent at 3 months to 5.00 percent at 10 years, a gap of 0.80 points, so it reads as normal.
Curve shape
Normal
Long yields at or above the 3 month. Usually read as short rates holding or rising, plus a premium for lending longer.
- 10 year minus 3 month
- 0.80%
- 10 year minus 2 year
- 0.50%
- Highest yield
- 30 year
- Range across the curve
- 1.00%
What a shape is usually read as is a reading of what one bond market is pricing, not a prediction and not advice on what to hold.
In short
- Drag the dot at any maturity up or down to set that yield.
- On a keyboard, tab to a dot and use the arrow keys to move it a tenth of a point at a time.
- Watch the shape name change the moment the 10 year or the 30 year crosses the dashed 3 month line.
- Press a shape button to jump straight to a normal, flat, inverted or humped curve.
- Compare the two spreads in the readout: 10 year against 3 month, and 10 year against 2 year.
What the curve plots
The horizontal axis is time to maturity, from 3 months at the left to 30 years at the right. The vertical axis is the annual yield, the single rate that makes a bond's remaining payments add up to its price today.
Two rules keep the picture meaningful. Every point comes from one issuer, almost always a government borrowing in its own currency, so what changes from left to right is mainly time rather than credit. And every point is taken at the same moment, because yields move all day. A yield curve is a snapshot.
The yields in this tool are illustrative teaching figures that you set yourself. They are not market data and not a forecast. For the full explanation of where the shape comes from, read the yield curve.
What each shape is usually read as
| Shape | What the line does | What it is usually read as |
|---|---|---|
| Normal | Rises left to right | Short rates expected to hold or rise, plus a premium for lending longer |
| Steep | A wide gap between the two ends | Rate rises expected, often after a stretch of cuts |
| Flat | Almost level across the maturities | Little change expected in short rates, or a term premium squeezed thin |
| Inverted | Falls left to right, short yields above long | Short rates expected to be lower in a year or two than they are today |
| Humped | Rises to a peak in the middle, then falls | A little more tightening now and cuts later |
The term premium in the first two rows is the extra yield a lender asks for committing money for longer: the risk premium attached to time itself. It is estimated by models rather than read off a screen, so a curve can steepen because the market changed its view of future rates or because that premium moved, and the line looks the same either way.
Which end moves matters as much as the slope. Drag only the 3 month point down and you get a steeper curve because the short end fell. Drag only the 30 year point up and you get a steeper curve because the long end rose. Same shape, different message, which is why the readout shows both ends rather than the slope alone.
What an inverted curve does and does not tell you
An inversion is strange on its face: lenders accept less to be paid back in ten years than in three months, which makes sense mainly if they expect short rates to fall a long way. In the United States the gap between the 10 year yield and the 3 month bill has turned negative before every recession dated since the late 1960s. That record is the reason the shape gets attention, and it is a correlation with a variable lag rather than a mechanism with a schedule.
- The sample is tiny. Fewer than ten United States recessions sit in the modern data, and the same handful of episodes is quoted every time.
- The converse has failed. Every recession being preceded by an inversion is not the same claim as every inversion being followed by one, and curves have inverted with no recession behind them.
- The lag has been all over the place. From the first inversion to the start of a recession has run from roughly six months to about two years, so it sets no timetable.
- The same shape has two possible causes. Expected cuts, or heavy demand for long bonds crushing the term premium. The line is identical and the message is not.
- Re-steepening is not an all clear. Recessions have often begun after the curve had already returned to a positive slope, because the cuts the market priced in arrive and steepen it.
- It says nothing about depth. Even when the call looks right, the shape carries no information about how deep or how long a downturn would be.
The nearest thing to a causal channel is bank lending: banks fund short and lend long, so a flat or inverted curve squeezes the margin on new loans and can tighten credit. Even that is argued over, because banks hedge the exposure and deposit rates move on their own schedule. Treat the curve as one input that shows what a bond market is currently pricing for short rates. This is educational material rather than financial advice.
Common questions
Which two maturities decide whether the curve is inverted?
The pair you subtract changes the answer, which is why this tool shows two. The 10 year yield minus the 3 month bill is the spread the recession research is built on. The 10 year minus the 2 year note is quoted more often in the press and tends to invert earlier. They can point different ways for months, so the headline word inverted means little without the pair attached.
Does an inverted yield curve cause a recession?
No. The curve is a set of prices, and prices summarise what buyers and sellers expect. An inversion says traders expect short-term rates to be lower later, which usually means they expect cuts, which usually means they expect weakness. The closest thing to a causal channel is bank lending margins, and that one is still argued over.
Why does a curve normally slope upward at all?
A long yield has to be roughly consistent with rolling short-term money over the same stretch, so it carries the average short rate the market expects plus a premium for the risks that come with time: that inflation runs hotter than expected, that rates move against you while your money is committed, or that you have to sell early at whatever price is on offer. That premium is normally positive, so the curve slopes up even when nobody expects rates to change.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.