Articles | January 29, 2020

The Yield Curve Explained: Why and What You Need to Know

A yield curve is a line that plots the yield rates, at a set point in time, of zero-coupon bonds with differing maturities.

Upward yield curve

An upward sloping yield curve is one in which longer maturity bonds have a higher yield than shorter-term bonds.

yield curve explained

Inverted yield curve

An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields.

inverted yield curve

Flat yield curve

A flat yield curve is one in which the shorter- and longer-term yields are very close to each other.

flat yield curve example

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What these yield curves mean for you

An upward sloping yield curve is the most common shape because longer maturity investors generally demand a premium to compensate for risks associated with time.

As a rule, the more mature a pension plan is, the more its discount rate will be reliant on the shorter-term bonds. Less mature plans are more sensitive to the longer-term yields.

Every quarter, Segal and Segal Marco Advisors examine the effect of changes in the assets and liabilities of a model private sector single-employer pension plan on its funded ratio over the four most recent quarters, viewing such changes through a marked-to-market lens.

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