The Term Structure of Interest Rates, why the yield curve slopes up and what an inversion warns
The yield curve explained: expectations theory, the liquidity premium that tilts it upward, and why an inverted curve warns of rate cuts and a possible recession.
A 3 minute 44 second animated lesson on the term structure of interest rates, the relationship between a bond yield and its maturity. Built for FIN301 students at Western Sydney University and for anyone meeting the yield curve for the first time.
The video plots the yield curve, the yield against maturity for bonds of the same risk, then explains its shape with two ideas. The expectations theory says a long rate is roughly the average of the short rates the market expects over the life of the bond, so if rates are expected to rise the curve slopes up. The liquidity premium, or term premium, adds a reward for tying money up for longer, which is why the curve usually slopes up even when short rates are expected to hold steady.
The lesson closes on the signal everyone watches. When the curve inverts, with long yields falling below short yields, the market is saying it expects short rates to be cut, which usually points to a weakening economy, so an inverted curve has often come before recessions. Pair the video with the Atlas concept page for the formula, a worked example, a quick quiz, and citations.