Markets & Quants Field note

Read a yield curve before telling its story

Identify the curve, its conventions and the source of a move before interpreting the shape.

A daylight view of the City of London skyline and buildings under construction.

Which curve is on the screen?

A yield curve relates maturity to a measure of yield. Government bond yields, zero-coupon spot rates and par swap rates are different objects. Before interpreting the shape, identify the instrument set, currency, credit characteristics and quoting conventions.

Level, slope and curvature

A level move shifts rates broadly in the same direction. A slope change alters the gap between shorter and longer maturities. A curvature change moves the middle differently from the ends. These are useful descriptions, but the actual market move need not fit neatly into one category.

Prices contain more than expectations

Longer-term yields can reflect expected future short rates as well as term premia and other instrument-specific influences. A forward rate is a rate implied by current discount factors under stated conventions; it is not a guaranteed future spot rate. Start with the observation, then make the interpretation and its assumptions explicit.

A learning example, not a market recommendation. Work through the assumptions before applying any model.

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