Treasury yield curve

Treasury yield curve is the graph of yields of on-the-run Treasuries versus maturity.

Yield curve can be used as benchmark for bonds (off-the-run treasury yield is considered as appropriate for non-US government bonds), but two problems exist:
· Yields of on-the-run Treasuries are lowered by demand in repo market
· Different coupons and reinvestment risk makes yields non-comparable.(greater duration or interest rate risk for new lower coupon on-the-run securities in comparison with off-the-run.)

Yields for missing maturities can use linear approximation:
Yield_n = Yield(lower) + {Yield(higher)-Yield(lower)}(n-lower) / (higher – lower)

Shapes of yield curve
Upward or Normal Yield Curve
· short-term rates are lower than long-term rates
Inverted Yield Curve
· short-term rates are higher than the longer part of the curve, occurs during economic contraction
Flat Yield Curve
· little or no change between short-term and long-term rates.