The yield curve,explained for traders.
The yield curve explained in 1 line: it shows the interest rate for government bonds of different lengths, from months to 30 years.
Its shape tells you what the market expects from the economy and from the central bank.
Normal and inverted
Normally, longer bonds pay more. When short rates are above long rates, the curve is inverted: the market expects cuts ahead, often because it sees slower growth.
What currency traders watch
The 2-year yield tracks rate expectations most closely. The gap between 2-year yields of 2 countries is the rate spread that moves the pair.
Use it in real trading
The tool informs the decision, it never makes it. Here is how it plays out on real trading days.
US 2-year yields rise faster than German ones. EURUSD tends to fall.
Long yields rise on growth hopes while short yields hold. Risk mood improves.
Mistakes to avoid
- Watching only the 10-year for FX.
- Reading an inversion as an instant crash signal.
- Ignoring the other country’s curve.
What makes it different
Rate spreads are part of the drivers behind every Smart Bias verdict.
Questions
Which yield matters most for FX?
The 2-year.
What does inversion mean?
Short rates are above long rates. The market expects cuts.
Does inversion mean recession?
It has often come before one, but timing is unreliable.