The U.S. Treasury Yield Curve

United States Treasuries are considered to be free of default risk because they are backed by the full faith and credit of the United States Government. As a result, treasury securities offer the lowest yields in the market and are often used as the benchmarks upon which the returns of all other bonds are compared.

The U.S. Treasury Yield Curve depicts the relationship between the yield-to-maturity and length-to-maturity of on-the-run (newly issued) treasury securities. The graph plots yield on the y-axis (vertical) and length to maturity on the x-axis (horizontal).  The following is an example of an on-the-run U.S. Treasury Yield Curve: 

The U.S. Treasury Yield Curve
Treasury Securities:   3-Month T-bill   6-Month T-bill   1-Year T-bill   2-Year T-note   5-Year T-note   10-Year T-note   30-Year T-bond

Notice that this yield curve has an upward slope. This is considered normal because investors demand larger rates of return for committing capital and bearing risk over longer periods of time. However, supply and demand forces can cause the U.S. Treasury yield curve to be flat, humped, or inverted.

Investors rely heavily on the U.S. Treasury yield curve to give them an idea of where the market expects interest rates to be in the future. The U.S. Treasury yield curve can also be used to compute yield spreads (reference the following tutorial).

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