The yield curve

if you were to borrow money for different amounts of time you can imagine the person lending you the money might charge you a different annual interest rate depending on with the perceived risk of having the money out there for that amount of time and the same thing is true when people lend money to the federal government so when you think about US Treasuries and US Treasuries that have different maturity and the maturity just means when is the government going to pay you back you could imagine that their different interest rates or there's different yields to maturity on that debt so if we were to plot it so let's say that and I'm just going to simplify here let's say that there's some Treasury debt that's maturing in one month and if you look at the price that you would have to pay for that debt versus the amount of money that the Treasury is going to pay you when it matures you see that the yield there is let's say it is 1% let's say for Treasuries that are maturing in three months in three months the yield is 1.5 percent let's say the Treasuries that are maturing in I'll just pick some maturity dates here let's say in one year in one year the yield is 3% 3% let's do a couple more let's say in 10 years so if you were to literally you're essentially borrowing lending money to the Treasury for 10 years now the annual interest rate on that let's say it's I don't know let's say it's three point five percent and let's throw one up one more up here let's say if you were to lend money to the US government for 30 years the yield is running at let's say it's 4% so here we have different yields for different maturities and if we essentially plot this on a graph we get ourselves a yield curve and it's usually called the yield curve when people talk about the yield curve they're talking about the plot for the US Treasury in dollars US Treasury bills and bonds you can have a yield curve really for any debt instrument for any corporate bonds or even trip for even government securities or corporate securities of other countries but in general when they talk about the yield curve they're talking about US Treasuries so let me draw a yield curve right over here so on this axis I will put maturity we scroll down a little bit maturity and we have a bunch of different maturities we have one month let's put squeeze it one month we have three months and this won't be completely to scale then we have one year actually one month and three month let's just put one month right at the beginning so one month then three months is a little bit further out one year would be right over here one year five years would be like there five years I didn't know how I don't have a five years let's do a ten years so I'll extend my line over so one year maybe ten years is over here ten years and then you have 30 years and I'll just draw 30 years as far as I can it's not completely the scale but it's my best shot and then we plot the yield for those different maturities so in one month you have a 1% yield so let me do it the percentages here so this is 1% 2% 3% 4% so on 1 month maturity the yield is 1% on three month maturity the yield is one and a half percent so maybe it'll be like right over there on one year maturity the yield is 3% so you plot one year this is 3% let me write it so this is 3% right over here this is 1.5% right over there and the first one right over there was 1% and then at ten years it's three and a half percent so three and a half is right over here and we want that to be ten years so I'm just plotting that point and in that 30 years it's 4% so 4% is what we get at 30 years and if we connect the dots and draw a curve we are giving ourselves the yield curve we are giving ourselves the yield curve that normally well I don't want to make it look like let me see how well I can draw it you have a curve that might look something like that just by looking this yield curve you see that when you lend the money when you lend money to the Treasury for a longer period of time you're going to get a higher interest than you would for a shorter period of time