---
title: "Yield Curve"
url: "https://mahouse.world/glossary/yield-curve"
type: "glossary term"
topic: "Fixed income"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Yield Curve

The yield curve is the line through the yields of government bonds from the shortest maturity to the longest at one moment. Its normal shape slopes upward, because lenders want more for lending longer; it flattens when the central bank raises short rates; it inverts, short above long, when markets expect rates to fall. Every loan, deposit and valuation is priced off a point on it.

**Also known as:** Term structure of interest rates, Curve, Inverted yield curve

## Key facts

- **Used at:** the pricing of every fixed-income instrument and loan (a five-year loan prices off the five-year point plus a spread), bank net interest margin (banks borrow short and lend long, so the slope is their margin), swap pricing, and discount rates in valuation
- **Binding:** no — a market observation, published daily for every major currency
- **Typical shapes:** normal (upward), flat, inverted; the US curve inverted in 2022–2024 for the longest stretch on record, the two-year yield above the ten-year, as the Federal Reserve raised short rates faster than long yields rose
- **Typical consequence for banks and fintechs:** a steep curve widens the margin between what a lender earns on long assets and pays on short funding; a flat or inverted curve squeezes it, and neobanks that earned on deposits in 2023 did so because short rates rose above what they paid
- **Parties:** central banks (which set the short end), bond markets (which set the rest), banks and lenders (whose margins are the slope), and everyone borrowing or valuing anything

## How the yield curve works in practice

A central bank sets the overnight rate; the market prices two-year, five-year, ten-year and thirty-year bonds according to where it expects that rate to go and what it demands for the uncertainty of lending longer. In a normal economy the curve slopes up: 3% at two years, 4% at ten, 4.5% at thirty. A bank that takes deposits at 1% and lends five-year mortgages at 5% earns the slope. A fintech lender pricing a three-year loan reads the three-year point, adds its credit spread and its margin, and quotes.

When the central bank raises short rates quickly, the short end rises faster than the long end and the curve flattens or inverts — the two-year at 5%, the ten-year at 4%. The market is saying rates will fall later; borrowers can lock in cheaper long-term money than short-term; and lenders that fund short and lend long lose their margin. The inversion of 2022–2024 explained much of fintech's year: neobanks holding customer deposits at near zero and placing them at 5% overnight earned windfalls; lenders funding fixed-rate books on floating lines were squeezed; and the valuations of every growth company fell as the whole curve moved up.

For a valuation, the ten-year point is the usual risk-free rate; a curve that moves three points moves every discounted cash flow with it.

## Example

A neobank holds €2bn of customer deposits paying 0.5% and places them at the central bank. In 2021 the overnight rate is −0.5%: the deposits cost the bank €10m a year to hold, and its business is interchange and subscriptions. By late 2023 the overnight rate is 4%: the same deposits earn €80m a year against €10m of interest paid, and the neobank reports its first profit — €55m — without a new product. Its lending arm, which funded €300m of fixed-rate loans at 6% with a floating line, sees its margin fall from 3 points to nil over the same period. The curve gave with one hand and took with the other; the board that understood it had hedged the loan book and left the deposits alone.

## Common mistakes

- Pricing a five-year loan off the overnight rate.
- Reading an inverted curve as a recession forecast with a date attached.
- A lender funding long, fixed-rate assets with short floating money and calling the margin structural.
- Neobank valuations built on 2023's deposit windfall as if the curve would stay.
- Using a single "interest rate" in a model where the curve's shape is the whole point.

## Related terms

- [Risk-Free Rate](https://mahouse.world/glossary/risk-free-rate.md)
- [Duration](https://mahouse.world/glossary/duration.md)
- [Credit Rating](https://mahouse.world/glossary/credit-rating.md)
- [Cost of Equity](https://mahouse.world/glossary/cost-of-equity.md)
- [Treasury Management](https://mahouse.world/glossary/treasury-management.md)
- [Senior Debt](https://mahouse.world/glossary/senior-debt.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov