The yield curve is just a graph that shows U.S. government bills and bonds with different maturity dates, along with the yield on those bonds for each date. The most common yield curve typically shows the interest rates for 3-month, 2-year, 5-year, 10-year, and 30-year Treasury securities.
When choosing to purchase a government bill or bond, it is important to first look at the yield curve to help you better decide which one to purchase. The yield curve plots the return of the bond or bill against its maturity date and allows investors to better visualize the best option for them and what they are looking to get out of purchasing a bill or bond.
Typically, investors require more compensation when they invest their money for longer periods of time. For example, 30-year Treasuries typically pay more in interest than 10-year treasuries. However, the current trend is a flattening of this yield curve, meaning that short term bonds almost pay the same as long term bonds. Investors are not receiving the extra compensation from the U.S. government to hold their money longer, which is significant. This is why the yield curve is important, because many people may believe that a 30-year Treasury would always pay more than a 10 year, however, currently this is not the case. Therefore, it is important to always look at the yield curve before purchasing a government bond or bill.
Investors may want to be tuned into the yield curve when they are choosing to purchase a government bill or bond. It is your best interest to know what you are getting into before you invest.
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