Yield Curve Risk

Bond investors sleep with one eye closed, and the other open, staring at the yield curve.

The yield curve is a graph that shows the relationship between interest rates and bond yields, and which helps determine whether short-term interest rates (and the economy) are gonna go up or down. The y-axis shows the interest rates, and the x-axis time.

The curve starts to climb upwards, as a normal, positive yield curve does. Everything is still okay. But when interest rates change, the yield curve shifts, and it gets flat or steep depending on what’s happening. This shift is the yield curve risk, which signals risk to the ever-awake bond investor. When this shift happens, the price of bonds change accordingly.

Sleep soundly, bond investors.