# Yield curve

Yield curve is a chart of interest rates on comparable debt securities across different maturities at a given time, showing how yields vary with the time until repayment.

## What it means

A yield curve plots borrowing rates against time to maturity. Its horizontal axis shows maturities, such as two and ten years; its vertical axis shows annualized yields, usually in percent. A commonly discussed example uses US Treasury securities, but curves can also be built for other borrowers or markets. To make a meaningful comparison, the securities should have broadly comparable credit risk and yield conventions.

A curve is **upward-sloping** when longer maturities have higher yields than shorter ones. It is **flat** when yields are similar and **inverted** when shorter maturities yield more than longer ones. These labels describe the maturities being compared; a curve can have different shapes over different sections. It is a snapshot, not a path that future interest rates must follow.

## How it is calculated

A yield curve is assembled by plotting observed yields for comparable securities at several maturities. There is no single formula that calculates its entire shape. One way to summarize part of the curve is the **10-year minus 2-year yield spread**:

`Yield spread (percentage points) = 10-year yield (%) − 2-year yield (%)`

- **10-year yield:** The annualized yield, expressed as a percent, for the security or benchmark at the 10-year maturity.
- **2-year yield:** The corresponding annualized yield, expressed as a percent, at the 2-year maturity.
- **Yield spread:** The difference in **percentage points**, not percent. Multiply the percentage-point result by 100 to express it in basis points; one percentage point equals 100 basis points.

Yield comparisons also depend on how yields are quoted and when observations are taken. A spread compares two points on a curve; it does not capture every maturity or reveal why yields differ.

## Worked example

Suppose, hypothetically, comparable US Treasury benchmarks show these annualized yields at the same observation time:

| Maturity | Yield |
|---|---:|
| 2 years | 4.0% |
| 5 years | 3.8% |
| 10 years | 3.5% |

1. Put maturity on the horizontal axis and yield on the vertical axis, then plot the three points.
2. Calculate the 10-year minus 2-year spread: `3.5% − 4.0% = −0.5 percentage points`.
3. Convert that result: `−0.5 × 100 = −50 basis points`.

The 10-year yield is lower than the 2-year yield, so this section is inverted. The example does not indicate what yields, stock prices or the economy will do next. A bond's yield is an annualized rate; the negative spread is **not** a 0.5% loss on a stock or bond trade.

## Why it matters before you trade

The yield curve gives context for interest-rate conditions that may matter to stock valuations and financing costs. For example, changes in longer-term yields can affect the discount rates used in valuations, while short-term rates can affect borrowing costs. The effect on any particular company depends on its cash flows, debt and other factors; the curve alone cannot establish a stock's fair value.

An inversion is sometimes discussed alongside recession risk, but it is not a recession timetable or a reliable signal for an individual stock trade. Before placing an order, distinguish this broad macroeconomic context from practical execution questions such as the stock's spread, liquidity and potential market impact. A macro view does not determine whether an order can be filled at an expected price.

## How PreTrAIde uses it

PreTrAIde's product facts do not state that it collects yield-curve data or uses the curve as an input. Its **pre-trade analysis** instead assesses a proposed stock basket before an order is placed. Its quantitative layer estimates factors including bid-ask spread, participation in daily volume, market impact and daily volatility; the analysis returns a GO, NO-GO or MODIFY verdict with reasoning. Those verdicts are decision support, not recommendations, and should not be read as yield-curve forecasts. Users place any trades themselves through their own broker.

## Common mistakes

- **Treating the curve as a stock-price forecast.** It describes yields at a point in time, not where a particular share will trade.
- **Confusing units.** A change from 3.5% to 4.0% is 0.5 percentage points, or 50 basis points—not a 0.5% relative change.
- **Comparing unlike securities.** Different credit risks or yield conventions can make a supposed maturity comparison misleading.
- **Assuming one spread describes the whole curve.** The 10-year minus 2-year spread says nothing by itself about the shape between or beyond those maturities.

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Source: https://pretraide.com/glossary/yield-curve