The yield curve: The price of time, on a single chart

Lending for one year or for ten years is not the same thing. And the market sets a different price for each length.

Put these rates on a chart: length along the bottom, rate up the side. You get the yield curve.

Specialists call it the term structure. It is the price of time, at a single glance.

Usually, it rises. Say three per cent for two years, three and a half for ten years. Lending for longer pays more.

Why? Because over ten years, anything can happen: inflation, a crisis, an unexpected need for cash.

This extra demanded for length is the term premium. The price of uncertainty.

If short rates are expected to stay at three per cent, the extra half point over ten years is this premium.

But sometimes, the curve flips. Two-year rates rise above ten-year rates. The curve is said to invert.

What it means: the market thinks rates will have to fall later. And rates fall when the economy slows.

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In the United States, an inversion has preceded almost every recession of the last fifty years. It is the most watched signal.

But a signal is not a law. In two thousand twenty-two, the American curve inverted for more than two years.

And throughout that time, the recession did not happen. The signal can be wrong, or come very early.

One last rate remains, and it is the only one that really counts for you: the real rate.

The real rate is the stated rate, minus inflation. What your money gains in purchasing power.

For the example, one thousand euros invested at three per cent. After a year, one thousand and thirty euros. You have gained.

Unless prices rose by five per cent. Your one thousand and thirty euros only buy what nine hundred and eighty-one euros used to.

Stated rate: plus three per cent. Real rate: minus one point nine. You got poorer, while earning interest.

Conversely, four per cent with two per cent inflation is almost two per cent of real gain.

The twist: a high rate is not necessarily a good rate. A low rate is not necessarily bad.

It all depends on the inflation alongside. Never look at a rate on its own.

The curve tells you what the market expects. The real rate tells you what you gain. Together, they let you read almost everything.