The yield curve is a graphical representation that shows the relationship between interest rates and the maturity dates of debt securities, typically government bonds. It illustrates how yields vary with different maturities, providing insights into investor expectations about future interest rates and economic conditions. A normal yield curve slopes upwards, indicating that longer-term bonds have higher yields than short-term ones, reflecting the risks associated with time. Conversely, an inverted yield curve occurs when short-term rates are higher than long-term rates, often signaling an impending economic recession. The shape of the yield curve can also be categorized as flat or humped, depending on the relative yields across different maturities, and is a crucial tool for investors and policymakers in assessing market sentiment and economic forecasts.
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