What Is a Treasury Yield Curve?

Beware of the flattening yield curve

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The U.S. Treasury yield curve compares the yields of short-term Treasury bills with long-term Treasury notes and bonds. The U.S. Treasury Department issues Treasury bills for terms of less than a year. It issues notes for terms of two, three, five, and 10 years. It issues bonds in terms of 20 and 30 years. All Treasury securities are often called notes or Treasurys for short.

Key Takeaways

  • The U.S. Treasury Department issues short- and long-term securities. The yield curve compares the yields of those notes.
  • There are three types of yield curves: normal, flat, and inverted.
  • Over various points in the past decade, the yield curve has been normal, flat, and inverted. Most recently, the yield curve has inverted.

Understanding Treasury Yields

The Treasury Department sets a fixed face value and interest rate for Treasurys. It then sells them at an auction. High demand drives the price above the face value. That decreases the yield because the government will pay back only the face value plus the stated interest rate.

Low demand drives the price below the face value. That increases the yield because the buyer paid less for the bond but receives the same interest rate. Yields always move in the opposite direction of Treasury bond prices. Treasury yields continuously change because they are resold daily on the open market.

Treasury bills, which are of short duration, don't usually pay as high a yield as medium-term notes and long-term bonds. 


Investors don't expect a high return rate for keeping their money tied up for a short period. But they do expect a higher return for keeping their money out of circulation for decades.

It's hard to imagine that someone would buy a 30-year Treasury bond and just let it sit, knowing the return on their investment was only a few percentage points. But some investors are so concerned about losses that they are willing to forgo a higher return on their investment in the stock market or real estate. They know the federal government won't default on the loan.

In a world of uncertainty, many investors are willing to sacrifice a higher return for that guarantee. That's important, even though investors don't buy Treasurys and hold them. They resell them on the secondary market. That's where holders of Treasurys sell them to institutional investors such as pension funds, insurance companies, and retirement mutual funds.

Three Types of Yield Curves

The three types of yield curves can tell you how investors feel about the economy. For that reason, they are a useful indicator of economic growth.

Normal yield curve: A normal yield curve is when investors are confident. They shy away from long-term notes, causing those yields to rise steeply. They expect the economy will grow quickly. Mortgage interest rates and other loans follow the yield curve. When there's a normal yield curve, a 30-year fixed mortgage will require you to pay much higher interest rates than a 15-year mortgage. If you can swing the payments, you'd be better off trying to qualify for the 15-year mortgage.

Flat yield curve: A flat yield curve is when the yields are low across the board. It shows that investors expect slow growth. It could mean that economic indicators send mixed messages, and some investors expect growth while others aren't as sure. When the yield curve is flat, you aren't going to save as much with a 15-year mortgage. You might as well take the 30-year loan and invest the savings for your retirement. Better yet, apply the savings against the principal and look toward the day you can own your home free and clear.

A flat yield curve means that banks probably aren't lending as much as they should because they don't receive a lot more return for the risks of lending out money for five, 10, or 15 years. As a result, they only lend to low-risk customers. They are more likely to save their excess funds in low-risk money market instruments and Treasury notes.

Inverted yield curve: An inverted yield curve can forecast a recession. It's when the yields on bonds with a shorter duration are higher than the bond yields that have a longer duration. Investors have little confidence in the near-term economy. They demand more yield for a short-term investment than for a long-term one. They would prefer to buy long-term bonds and tie up their money for years, even though they receive lower yields. The yield curve inverted before both the 2001 and 2008 recessions.  

Significant Recent Events in the Yield Curve

There are some recent examples of the conditions that create different flat and inverted yield curves.

  • January 31, 2011: The yield curve reached a post-recession peak. The two-year note yield was 0.58%. That's 2.84 basis points lower than the 10-year note yield of 3.42%. That difference is called the Treasury yield spread. The most commonly quoted spread is between the two-year note and the 10-year note. That spread revealed an upward-sloping yield curve.
  • June 1, 2012: In 2012, the economy was growing at a healthy rate of 2%, but the eurozone debt crisis created a lot of uncertainty. When the monthly jobs report came in lower than expected, panicked investors sold stocks and bought Treasurys. In June, the 10-year Treasury note hit a 200-year low in intraday trading. The yield on the two-year note was 0.25%, while the yield on the 10-year was 1.47%. Investors had become less optimistic about long-term growth. They didn't require as much of a yield to tie up their money for longer. The spread fell to 1.22.
  • July 1, 2016: The 10-year Treasury yield hit a new record low during intraday trading as investors worried about Brexit, Great Britain's vote to leave the European Union. By then, the yield curve had become even flatter. The spread was just 0.87. Investors were not confident about future growth. It's also because the Fed raised the fed funds rate in December 2015. That forced the yield higher on short-term Treasury bills.
  • December 3, 2018: The yield curve inverted.  The yield on the short-term three-year note was 2.84% and just higher than the yield on the long-term five-year note.


It's an unusual situation when investors demand more yield for the short-term bills than they do for the longer-term notes and bonds. They do this if they expect the economy to do worse in three years than in five years. 

  • August 12, 2019: The 10-year yield hit a three-year low of 1.65%. That was below the 1-year note yield of 1.75%. A few days after, the yield on the 30-year bond briefly fell below 2% for the first time. Although the dollar was strengthening, it was due to a flight to safety as investors rushed to Treasurys.
  • April 1, 2022: The curve inverted again. The yield on two-year Treasury notes was 2.44% while the ten-year yield was 2.38%. Fed watchers are keeping close eyes on the central bank as it decides how to proceed with interest rates. Many economists have said it does not necessarily predict a recession but does reflect hesitation in the market.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Department of Treasury's TreasuryDirect. "The Basics of Treasury Securities."

  2. U.S. Department of the Treasury. "Daily Treasury Par Yield Curve Rates."

  3. Board of Governors of the Federal Reserve. "(Don't Fear) The Yield Curve, Reprise."

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